Try telling BHP there’s a global pandemic and a worldwide economic slump. The world’s biggest listed diversified mining group is hotfoot from reporting its best first-half profit in seven years and declaring a record interim dividend that looks set to make it among the biggest payers in Europe this year.
In an upbeat set of six-month results published overnight on Monday, the blue-chip company hailed the strength of demand for iron ore from China as the world’s second-largest economy pursues its ferocious stimulus programme.
Demand across the rest of the world will begin to recover over the same period, further boosting the biggest part of its business, BHP said.
It undershot consensus forecasts on its underlying profits over the six months to the end of December and its coal-producing arm suffered a loss. However, with the rollout of Covid vaccines increasing confidence in stock markets and commodity prices, the group — and its share price — seems to be on a roll.
BHP was created in its modern form in 2001 through the merger of the mining and metals groups BHP and Billiton, dropping the latter from its name in 2018. It mines and processes iron ore, copper, petroleum and coal and also has interests in gas. The company operates a dual-listed structure with its shares quoted in Australia, where shareholders receive special tax benefits, and the UK, where its strong recent share price performance has made it the biggest constituent of the FTSE 100 with a valuation of £124.5 billion.
In part as the result of pressure from the activist shareholder Elliott Advisors, which has a stake of just under 4.7 per cent, the miner has promised to keep its structure under review, possibly unifying its quote in Australia at some point.
Shareholders will be delighted at the dividend payout, which is 55 per cent higher than at the same point last year and will cost $5.1 billion. The miner has a policy of paying out at least half of its underlying profits as a dividend, which in normal circumstances would have led to a payment of 60 US cents.
However, spurred by runaway commodity prices — the price of iron ore has almost doubled over the past 12 months — the board decided to top up the award such that 85 per cent of its attributable profits will be handed back to its owners.
Underpinning the payout, of course, is the ability of miners to dig up extraordinary amounts of cash from their operations. The group generated just under $5.2 billion in free cash flow during its first half, which is almost exactly equivalent to the amount in dividends being paid.
However, sustainability is of growing importance to investors. Petroleum and coal are big pollutants and the energy-intensive production of iron ore causes air pollution, all of which might put off some prospective shareholders.
On the other hand, copper, BHP’s second-largest generator of revenues, is important in electric vehicles and its production is highly profitable for the company.
BHP is, to be fair, alive to these issues: it is exploring options for exiting coal and will this year decide whether to press on with a potash project in Canada that would probably form a core part of its output.
For investors that are comfortable with the environmental issues and the ever-present worries about safety and potential fatalities at some of its higher-risk projects, the metrics of BHP’s shares are highly attractive.
The stock, which rose 32½p or 1.5 per cent to close at £22.61 yesterday, trades for just 10.4 times UBS’s forecast earnings for a dividend yield of just under 6.7 per cent. On those figures, the shares look like a buy.
Advice Buy
Why Strong demand for its core commodities, greater interest in sustainability and the shares are good value
Dunelm
It was no small share sale. Will Adderley, deputy chairman of Dunelm, offloaded 15 million shares in the homeware retailer on Monday night, raking in £192 million by giving up a 7.4 per cent stake.
Adderley, 48, is the son of Dunelm’s two founders and the sale came just under a week after it posted strong half-year results.
Shareholders tend to get spooked when directors dump their shares, often interpreting it as a lack of confidence in the future of the business. It should be said that Adderley and the rest of the family continue to hold 87.4 million shares, a 43.2 per cent stake worth just over £1.2 billion based on yesterday’s price.
The shares were placed at a 9 per cent discount to the closing level on Monday and yesterday, Dunelm stock unsurprisingly shed just under 7 per cent, losing 96p to £13.13.
Dunelm said that Adderley, who last sold stock in April 2016, was ensuring that his portfolio was diversified, so should investors follow and cut their holdings?
Adderley’s parents, Bill and Jean, founded Dunelm in 1979 when they set up a market stall in Leicester selling ready-made curtains. The retailer now sells a wide range of goods, from rugs and lights to cushions, and operates from 174 shops, employing about 10,000 staff. With annual sales that top £1 billion and profits last year of nearly £110 million, it is a constituent of the FTSE 250 midcap index.
What has increasingly distinguished Dunelm from its competitors has been its ability to make a success of its online operation, which accounts for about 40 per cent of group sales. This is the main reason that trading has held up relatively well even when lockdowns have forced it to shut its estate, during which it has managed to maintain sales at about 70 per cent of the previous year’s levels. With sales over the six months to the end of December growing at more than twice the rate of the homeware market, Dunelm is clearly gaining market share.
For these reasons, the shares are dear, valued at 37.8 times Peel Hunt’s forecast earnings and with a dividend yield of just 1.2 per cent. That is a deterrent to prospective investors but present owners should hang on.
Advice Hold
Why Remarkably resilient retailer with more to give
