Blog #4: BHP Billiton's dividend cut

Recently, it has been reported that BHP Billiton, an Anglo-Australian mining company, as well as the biggest mining company, had cut down its dividend, lowering the payout for the first time in 15 years (Bloomberg, 2016). According to Bloomberg, the company was trying to protect its balance sheet and credit ratings because of the huge decline on prices of commodities (see image below): the interim dividend was cut down from 62 cents to 16 cents and net loss was 5.67 billion dollars in the six months to 31st of December last year. Ambrose (2016) states that "the collapse of commodities prices and BHP's failed bet on the US shale industry drove its worst ever financial results". It was no wonder that the dividend was cut so much. In order to maintain payout, they would have to cut down dividend. Jac Nasser, the chairman of the company also claims that they did not made this changes lightly (FinancialTimes, 2016)

Source: Financial Times (2016)

The BHP finance director said that "the world has become a lot less certain, there's high volatility, the macro outlook is more uncertain and in particular the oil outlook has changed. We didn't see the depths of the fall in oil prices quite honestly". One of the main reasons why their dividend was cut was because China had slowdown coupled with miners' investments. Another reason is that the oil price was also falling. According to Financial Times (2016), BHP did not foreseen oil price slipping below $30 a barrel.

It is not surprising to see that their share price in Australia dropped for over 40% over the past 12 months.Even the standard & Poor's cut its rating from A+ to A. According to Financial Times (2016), the rating would be downgraded even further depending on the announced dividend policy. This can be seen as a threat to the company.

In my opinion, this kind of news is always very unpredictable, such as the decline in price of oil and commodities. We wouldn't know when will they rise, or when will they decline even further again. In a way, I think it is a wise choice that BHP cut its dividend in order to save its balance sheet Without optimal earnings, BHP is going to damage its balance sheet. I believe that by cutting off dividends, it might be able to prevent the downgrading of their credit ratings. Which can also be a good thing. One way BHP can do to get back up is to restructure there capital structure in order to reduce the amount of gearing. This news has taught me that even though a company had good capital structure, in a few years time, it may not be as good as it was. Companies do have to constantly readjust their capital structure in order to maximize shareholder's wealth.

Sources:
Bloomberg, 2016 http://www.bloomberg.com/news/articles/2016-02-22/bhp-cuts-dividend-as-first-half-profits-fall-92-on-price-rout

http://www.ft.com/fastft/2016/02/22/bhp-billiton-slashes-dividend-as-profits-slide/?ftcamp=engage/capi/widget/client/openft/b2b