BHP Billiton Limited's (ASX: BHP) progressive dividend policy days could be numbered with analysts suggesting it could be forced to cut its payouts within two years.
Australia's biggest miner has, for a long time, promised to increase or at very least maintain its US dollar-denominated dividends every six months. The policy was sustainable through the mining boom but plummeting commodity prices and the loss of various cash-generating assets to the South32 Ltd (ASX: S32) demerger have put a dark cloud over its future.
What's more, BHP's catastrophic dam failure in Brazil one week ago is also expected to cost the miner hundreds of millions of dollars in potential fines as well as clean-up and compensation costs, putting it in an even worse position to continue increasing dividends.
In the 2015 financial year (FY15), BHP Billiton paid out a total of US $6.5 billion in dividends to shareholders – a total of US $1.24 per share. By comparison, it reported a US $4.39 billion profit after tax (from continuing operations) for the year with earnings per share (EPS) of US 120.7 cents per share. As highlighted by my colleague, it was the first time since 2006 that BHP paid out more in dividends than it generated in earnings per share.
It is clear why this is unsustainable. BHP could only continue increasing its dividends if it took out more debt or sold assets to raise cash, both of which would weaken the balance sheet.
According to The Australian Financial Review, analysts from Commonwealth Bank think BHP will maintain the US 124 cent per share (AU 174 cents) dividend through the 2016 financial year, but will be forced to cut the dividend by more than 35% to just US 80 cents (AU 112 cents) in FY17.
A lower Australian dollar would provide some support for local investors although the dividend yield would still fall dramatically. As highlighted by the AFR, the analysts added that they believe the dividend would be maintained at around that level until 2020.
Although BHP shares are currently trading on a fully franked dividend yield around 8%, investors would be wise to consider what the dividend will be like in the future, rather than how it looked in the past. In my opinion, investors should continue to ignore BHP Billiton shares and focus their attention on more reliable dividend companies.
