By Jonathan Yates
With Patriot Coal’s bankruptcy last week, stocks in the energy sector segment were even more out of favor. China’s GDP numbers for the second quarter were poorly received, and Australian firms were hit hard due to the country’s massive natural resources trade with China. Melbourne-based BHP Billiton (BHP) was one of those firms, but it is an appealing value investment.
BHP Billiton is an oil, natural gas, and coal industry conglomerate. It is the world’s largest mining company, producing and marketing a wide range of industrial metals and materials, ranging from aluminum to zinc. Much of its business is trade with China. As a result of slumping growth in the People’s Republic and its lesser need for energy commodities such as oil and coal, the past year has been a bad one for the shareholders of BHP Billiton, down 29.56% for the last 52 weeks of market action.
BHP Billiton’s reliance on the Chinese market is demonstrated by the chart below, tracing the paths of its share price with that of the main exchange traded fund for China, the iShares FTSE China 25 Index (FXI).
For the long-term investor looking for exposure to the energy sector, BHP Billiton is very appealing as a dividend-paying stock and also attractive as a value investment. As a dividend-paying stock, BHP Billiton provides an income stream at a rate of 3.48%. The average for a dividend-paying stock on the Standard & Poor’s 500 Index is around 2%. Making the dividend income of this value investment even more alluring is the low payout ratio of only 25.60%, about half that of the S&P 500 average. That means there is ample cash flow for dividend increases or stock buybacks in the future to increase the total return for shareholders.
For growth and value investment, BHP Billiton has a profit margin of 25.60%. Even with the fall in energy prices, BHP Billiton is still making money at a very impressive rate; its profit margin is 20%. The return on equity (ROE) is particularly robust at 38.59%, where the average ROE for a company is around 15%. The price-to-earnings growth ratio for BHP Billiton is particularly bullish at 0.65. 1 is considered adequate; the lower the better.
At $63.22, BHP Billiton is trading very close to its 52-week low of $59.87. The price-to-earnings ratio is 7.45. In February, a Buy rating was reiterated by Dahlman Rose for BHP Billiton with a target price of $96. Eventually, China will rebound and when it does, so too will the share price of this value investment.