The first half year was a difficult one for BHP Billiton (BHP) with revenues falling by 14 percent and operating cash flow down 48 percent. Net debt rose to $30.4bn from $23.6bn at the 30 June 2012 year end with a rise in gearing to 45 percent from 36 percent.
Earlier in December, I released an article on BHP Billiton stating that its diversity in comparison to its competitors guarantees future dividend increases. You can access the article Here. However, that diversity may now be under threat.
BHP Billiton divesting non-core activities
With the global economy currently in slowdown mode, BHP Billiton is now contemplating to raise cash by divesting non-core assets from their portfolios. Analysts at Deutsche Bank estimate that BHP Billiton and Rio Tinto have earmarked US$35 billion in potential asset sales, with as much as US$25 billion for the former and US$10 billion for the latter.
Though investors have speculated about such a possibility for some time, BHP will have a new management team in place with a mandate to pursue greater efficiencies and simplify its portfolio.
The CEOs of both firms recently stepped down in the wake of significant writedowns taken for acquisitions during their tenure.
Accelerating asset sales in 2013 and onwards
BHP has already been pursuing a targeted divestment program, with asset sales totaling US$4.3 billion during the second half of 2012.
Recently, CFO Graham Kerr revealed that cost control remains all-important, while exploration is not a key focus for now. More importantly is that BHP is contemplating to sell 10 non-core assets over the next several years.
Management had previously confirmed that it plans to sell the Gregory-Crinum coal mine, located in Australia's Queensland state. Now analysts are speculating about what other assets may be up for sale.
Deutsche Bank's analysts believe eventual divestments could include aluminum mining assets in Australia and Brazil, nickel and thermal coal mines in Australia, manganese projects in South Africa, a copper mine in Arizona, and oil fields in Pakistan, Algeria and the Caribbean.
All of this activity is also taking place amid pressure from credit rating agencies. Earlier this week, Standard & Poor's announced that BHP's "A" ratings could be in jeopardy if they don't reduce costs and cut debt. In particular, S&P said that BHP's buffer against falling commodity prices is getting weaker.
If and when BHP embarks on further disposals securing good returns, and, if it does not embark on a major share buy-back exercise with part of the proceeds, it should assist BHP Billiton shoring up its balance sheets by eliminating debt. That, in turn, in time, should help ensure the sustainability of their current dividends until commodities rebound.
Deutsche Bank believes these asset sales should help pare down BHP Billiton's debt over the next several years. And that could also lead to an eventual increase in the dividend, with payout ratios possibly rising by at least 10 percent in 2014.
BHP Billiton, having released its half year accounts in US dollars, reported an interim dividend of US 57 cents, having gone ex-dividend on 6 March, while 36.9 pence is payable on 28 March. The dividend payout is up on last year's interim 55 cents (34.5 pence) - both ahead of inflation in dollar and sterling terms.
Analysts' 2013 dividend forecast in sterling is 76.5 pence. With the Aussie dollar in the middle of a slow and steady climb versus the ongoing devaluation of pound sterling versus both the US and Aussie dollar, as a pound sterling dividend income investor, I expect good returns in pound sterling in due course.
Trading currently "somewhere-in-between" being historically undervalued and overvalued and with further dividend increases in pound sterling in the cards BHP remains a firm hold in the Dividend Income Portfolio.
Additional disclosure: We run the Dividend Income Portfolio, which owns a shareholding in BHP Billiton Plc, purchased when the share was historically undervalued as per our valuation methodology. Currently, BHP Billiton is neither undervalued nor overvalued.