The Big Australian has delivered a big uplift in underlying net profit in FY18 but investors shouldn't expect a repeat this year as BHP Billiton Limited (ASX: BHP) has run out of growth levers to pull.
But investors shouldn't worry as the world's biggest miner still has enough goodies in the bag to appease shareholders following its 30% share price rally over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 10%.
The stock was largely flat at the opening bell but that's probably a good outcome given that BHP's profit increase has missed consensus expectations by around 3% and investors may be disappointed by news that the miner had cut its forecast on productivity gains for FY19.
Before I get into the bad news, here are some of the key positive highlights from BHP's full year results for the period ended June 30, 2018:
- Total revenue jumped 20% to US$43.6 billion and underlying net profit surged by a third to US$8.9 billion thanks to higher commodity prices and increased production of its key commodities.
- BHP declared a record final dividend of US63 cents compared to US43 cents a share last year, taking the total dividend to US$1.18 (fully franked) for FY18.
- The miner is dangling a carrot in front of investors as it reaffirmed its promise to return the net proceeds from the US$10.8 billion sale of its unconventional shale assets in the US.
- Statutory net profit dropped 37% to US$3.7 billion due to the loss on the sale of its shale assets and the Samarco mine disaster.
- Management believes demand for its commodities is likely to stay firm in FY19 even as the market comes under pressure from rising trade tensions. Prices aren't tipped to rise materially but they aren't expected to capitulate either.
On the downside, here are a few things that could cast a shadow over the company:
- Costs are tipped to rise. This is a theme across the sector and the weakening Australian dollar could help cushion some of this impact at BHP's local operations.
- BHP has slashed its productivity savings target in half to US$1 billion due to asset divestments and a disappointing performance at Queensland Coal.
- Don't expect production growth to drive profit increases as output is unlikely to change much in FY19 over FY18.
- This means profit this year is likely to fall although that's what the market is expecting with consensus forecasts tipping a 4% decline in underlying earnings per share.
- But analysts may downgrade their forecasts for FY19 on the back of the latest results.
- Investors shouldn't assume that the dividend will be sustained. The final dividend represents a payout ratio of 69%, which is significantly ahead of management's policy of at least 50%. The way management had phrased its description of the payout ratio makes me believe that this could be a one-off. Further, the expected drop in net profit in FY19 will mean BHP will need to lift the ratio if it wants to sustain the dividend.
I am sticking to my overweight position on BHP and I suspect analysts who have rated the stock a "buy" will too as the positive fundamental outlook for the miner has not changed.
A lift in the payout ratio isn't out of the question either as the cashed-up miner with modest capital expenditure will have little reason not to distribute more of its profits.
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