Headwinds offset BHP dividend record

A bumper year for shareholder returns at BHP has given way to uncertainty over the miner's 2020 outlook.

Despite annual results trumpeting a record year of investor returns, BHP Group (LSE:BHP) shares continued to drift today on fears that this might be as good as it gets in the cycle for the mining giant.

The London-listed stock topped 2,000p for the first time in five years last month, only to fall back over recent weeks as economic jitters linked to the US-China trade war show signs of slowing demand for its iron ore and copper output.

The uncertain mood wasn't helped by today's results for the year to the end of June being short of some City expectations, both at an underlying profits level and in terms of the final dividend. The stock was 2% cheaper at one point, at below 1,750p.

The dividend award of 78 US cents per share was still a record and represented a total of $4 billion for a 73% pay-out ratio, well above the stated target of 50%. This award was also on top of the US$17 billion already distributed to shareholders in the past year. 

BHP said the record cash returns to shareholders reflected a strategy which over the past five years has seen it increase volumes by 10% and reduce unit costs by over 20%.

Higher average realised prices for iron ore have also helped massively, with the commodity's price up 18% over the financial year and by 40% between the second and first halves. Iron ore accounted for 48% of group earnings, with copper next with 19%.

The iron ore price has dipped recently in the face of tougher market conditions and a return to more normal supply levels, while sentiment towards BHP hasn't been helped by recent productivity issues after unplanned outages earlier in the financial year.

Some analysts were looking for another special dividend with today's results, but BHP made it clear that it was right to be cautious about the short-term outlook.

CFO Peter Beaven said:

"We are acutely aware of the current trade tensions and consider downside scenarios in all our cash allocation decisions. With our strong balance sheet, solid operational performance, and a flexible dividend policy, we are well positioned to weather any future volatility."

Analysts at Jefferies believe capital returns look to have peaked for the current cycle, given factors such as lower prices and rising costs and capital expenditure. The broker recently downgraded the stock to "hold", while Morgan Stanley is equalweight on BHP at 1,810p.

BHP says it enters the 2020 financial year with "positive momentum and a strong outlook for both volume and cost". For the year ahead, it expects volume growth of 2% alongside a further increase in return on capital employed.

Longer-term, it believes opportunities will come from population growth and better living standards, as well as so-called megatrends such as electrification and decarbonisation. All these factors are likely to increase demand for its products "for decades to come".

BHP has now generated US$35 billion of free cash flow over the past three years, excluding the $10 billion in proceeds from the sale of its onshore US assets. 

It said:

"Even with fluctuations in prices and volumes over the past few years, our diversified portfolio has provided strong and stable cash flows."