BHP Billiton: Bond Substitute

| About: BHP Billiton (BHP)

In a world starved for yield, income investors are being forced out the risk curve. Simultaneously, the baby boomers are looking to retire and decrease their risk profile. Perhaps traditional fixed income investments are return-free risk, carrying a miserly yield with the likelihood of receiving capital paid back with decreased purchasing power.

Investors have been turning to MLPs and REITs for high income. These securities distribute the large majority of their earnings with little growth. Popular too are large multi-national consumer products stocks. Add to this list of income stocks BHP Billiton (NYSE:BHP).

As the world's largest mining company, BHP is similar to Exxon Mobil (NYSE:XOM) in that operations are large, diverse and numerous. The companies are extremely well capitalized. BHP's largest division is iron ore with petroleum the next in size. Steel making metallurgical coal, base metals and electrical generating thermal coal are significant business divisions too.

BHP has a $190 billion market cap, making it one of the largest companies in the world. Yet BHP has a meaningful project pipeline for growth with $80 billion expected to be spent over the next five years, including $27 billion already committed. The growth profile extends BHP's diversity by product, by geography and market. The commitment to operating large, long life, low cost assets remains unchanged.

Petroleum will be a more important contributor in the future. The purchase from Chesapeake (NYSE:CHK) of the Fayetteville asset appears to be disappointing over the short and intermediate term, but the Petrohawk acquisition gave BHP premier Eagle Ford real estate. After being rebuffed by Potash of Saskatchewan (NYSE:POT) and striking nationalistic chords, BHP has refocused on project development and friendly deals.

Financial strength, diversity of operations and a low cost structure give BHP safety. Significant leverage exists, however, to the industrialization of China and the emerging markets. As nations industrialize out of poverty their propensity for the materials and energy BHP produces increases. Knowing these nations want to continue to advance, selling them what they need looks to be a good business for the long term.

In February the Australia-based BHP came to market offering bonds. The 10-year bond was priced at 2.875%, while the sovereign government of Australia (they have a printing press to prevent default) has 10-year yield at 4.25%. Bond investors believe BHP to be safe.

Meanwhile, BHP's common stock has a yield of 3.07%, having raised it 20% last year. Over the last 10 years the annual growth rate of the dividend was 26%. Since 2005 BHP also bought back 15% of outstanding shares in repurchases. BHP is disciplined in its growth, and shareholder conscious. Owning the common stock may be considered for the income growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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