With every market rally being a prelude to yet another bout of sell-off caused by yet another data release indicating economic robustness, estimates of investment returns based on capital appreciation have temporarily gone out of the window.
Moreover, with the Fed determined to keep raising rates in the foreseeable future, an economic slowdown has gone from being just a possibility to an eventuality.
Steve Sosnick, the chief strategist at Interactive Brokers, summed it up, “The Fed has repeatedly stated their desire to raise rates to a level that they deem sufficient to fight inflation, even if it risks employment and economic output. In other words, a recession.”
With widespread recession fears, investing in dividend-paying stocks could ensure consistent income generation for investors to endure a topsy-turvy market in the foreseeable future.
Headquartered in Melbourne, Australia, BHP Group Limited (BHP) operates globally as a resources company through Petroleum, Copper, Iron Ore, and Coal segments. The company has increased its dividend payout at 37.6% CAGR over the past three years.
BHP’s impressive track record of returning capital to shareholders is supported by its excellent business performance. Over the past three years, BHP’s revenue has grown at a 13.6% CAGR. During the same period, the company also registered EBITDA and net income growth of 19.2% and 55%, respectively.
The stock has gained 5.1% over the past month and 15% year-to-date to close the last trading session at $61.88.
Let’s closely examine the factors that make it worthy of investment.
Positive Recent Developments
On December 22, BHP announced that it has entered into a Scheme Implementation Deed (SID) with OZ Minerals Limited (OZL) to acquire 100% of OZL by way of a scheme of arrangement for a cash price of A$28.25 ($18.96) per OZL share, corresponding to an enterprise value of A$9.6 billion ($6.44 billion) for OZL.
BHP CEO Mike Henry stated, “The combination of BHP and OZL’s assets, skills, and technical expertise provides a unique opportunity not available under separate ownership.”
On November 3, BHP announced that it had signed a renewable Power Purchase Agreement (PPA) with Neoen to supply 70 megawatts (MW) of electricity to Olympic Dam. This allows Olympic Dam to record a net zero emission position for the contracted supply volume.
Solid Financials
For the fiscal ended June 30, 2022, BHP’s underlying EBITDA and profit from continuing operations increased 15.9% and 33.7% year-over-year to $40.63 billion and $34.11 billion, respectively.
During the same period, the company’s attributable profit and basic earnings per ordinary share from total operations increased 173% year-over-year to $30.90 billion and $6.10, respectively.
Attractive Dividend
While reducing its debt, BHP paid a final dividend of $1.75 per share, bringing total cash dividends announced for the full year to a record $3.25 per share.
BHP’s four-year average dividend yield is 7.79%, and its forward annual dividend of $7 per share translates to an 11.4% yield at the current price.
BHP’s dividend payouts have increased at 33.1% CAGR over the past five years.
Attractive Valuation
In terms of its forward P/E, BHP is trading at 12.25x, slightly lower than the industry average of 12.31x. The stock’s forward EV/EBITDA multiple of 5.24 is 26.8% lower than the industry average of 7.16.
Moreover, BHP’s forward Price/Cash Flow multiple of 6.41 is 11.2% lower than the industry average of 7.28.
Excellent Capital Allocation by Management
BHP’s trailing 12-month gross profit margin of 85.72% is higher than the industry average of 30.82%. Also, the company’s trailing-12-month EBITDA margin and net income margin of 57.56% and 47.24% comfortably exceed the industry averages of 20.44% and 8.88%, respectively.
Additionally, BHP’s trailing-12-month ROCE, ROTC, and ROTA of 42.08%, 28.56%, and 32.47% are significantly higher than the respective industry averages of 13.39%, 7.43%, and 5.62%.
POWR Ratings Reflect Promising Prospects
BHP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has a B grade for Value and Quality, consistent with its attractive valuation and impressive profitability.
Unsurprisingly, BHP tops the list of 36 stocks in the B-rated Industrial - Metals industry.
Click here to see the additional POWR Ratings for BHP’s Growth, Sentiment, Momentum, and Stability.
Bottom Line
For the fiscal ending June 30, 2023, analysts expect BHP’s EPS to increase 6.6% year-over-year to $5.01. In addition to the company’s strong balance sheet, capital discipline, and commitment to sustainable development, its income generation track record and potential make it an attractive investment option for solid risk-adjusted returns.
How Does BHP Group Limited (BHP) Stack up Against Its Peers?
While BHP tops its industry group and has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its B-rated industry peers: Vale S.A. (VALE), Anglo American plc (NGLOY), and Marubeni Corporation (MARUY).
BHP shares were trading at $61.89 per share on Friday afternoon, up $0.48 (+0.78%). Year-to-date, BHP has gained 28.39%, versus a -18.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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