Iron ore

Market correction portfolio update / BHP Billiton results review

Iron oreDisclosure: I own shares of BHP Billiton.

Monday’s market correction wasn’t a lot of fun.

Clearly I had made the classic value investing mistake of buying too soon with some of my recent purchases, especially in the commodity sector.

Yet the logic behind each purchase remains valid, as far as I can see, so I did the only sensible thing to my portfolio on Monday — absolutely nothing.

I haven’t bought or sold a share this week. I should say that if funds had permitted I would have topped up on a number of stocks, but sadly I was already pretty much fully invested. Possibly a lesson for the future.

What about BHP?

Moving on from that, yesterday’s results from BHP Billiton plc (LON:BLT) coincided with a market rebound. The big miner ended the day up by around 6%.

I was encouraged by the figures, too. The firm maintained its progressive dividend commitment, inching up the payout by 2% to 124 cents.

However, as I’ve said before, in my view the most important financials in the current environment relate to cash flow. A company generating positive cash flow with a well-structured debt profile won’t run into trouble.

Cashflow & capex

BHP appears to score highly in the cash flow department. After stripping out the assets that have been divested, mainly into South32, we get the following:

  • Net cash flow from continuing operations: $17.8bn
  • Net cash ourflow from investing in continuing operations: $11.5bn.
  • Free cash flow from continuing operations:$6.3bn.
  • Price-to-free cash flow ratio of 13.5 (continuing operations)

Although net repayment of debt and dividend payments totalled $7.2bn, I think this is a pretty strong cash flow result in the circumstances.

Reducing its cash balance from $8.7bn to $6.6bn also BHP to reduce net debt by $1.4bn to $24.4bn during the period, which should help to protect its credit rating.

It’s worth reiterating the value of BHP’s ‘A’ credit rating. The last time the firm issued new debt, in April, it was able to sell 2030 bonds with a rate of just 1.5%. That’s lower than most governments can manage.

BHP plans further cuts to capex for the coming year. Planned expenditure is expected to fall from $11bn in 2014/15 to $8.5bn in 2015/16, and to $7.0bn in the 2016/17.

I suspect this will be enough to protect the dividend and the firm’s balance sheet strength, although it’s not possible to be certain at this point.

Outlook

Given BHP’s balance sheet strength and cash generating ability, the firm’s 7%+ yield alone would be enough to make it a buy at the moment, in my view. A trailing P/E ratio of 13.5 backed by free cash flow is also pretty decent.

Although BHP’s earnings are expected to fall again in the coming year, I believe the big miner remains a buy, and will continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

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