BHP is about to receive a $15 billion cash windfall -- here's what global investors think the company should do with it

BHP CEO Andrew Mackenzie (Greg Wood / Getty Images)
  • BHP has $US10.8 billion to return to shareholders after selling its US shale oil assets.
  • But UBS says a decision on how best to return the funds “is not a simple one”.
  • Based on a UBS survey, between 6-80% of institutional investors would like to see the money spent on share buybacks.

In late July, BHP sold its US shale oil assets to a BP subsidiary for $U10.8 billion ($15.1 billion).

It was an all-cash deal, which leaves the company with a serious pile of extra funds to play with (notwithstanding the $2.8 billion impairment charge that was booked as part of the sale).

BHP has made it clear that the proceeds will be returned to shareholders, so the focus in the investment community has now turned to how it should go about doing that.

“A decision regarding the best option(s) is not a simple one,” analysts at UBS said.

Broadly speaking, BHP can return the funds via a share buyback or paying extra dividends.

It could be either one or a combination of the two, and BHP has been reaching out to shareholders to get feedback on the most efficient pathway.

For their part, the UBS analysts asked institutional investors in Asia, Europe and the US about what BHP should do with the cash. Here are the results:

Source: UBS

Buybacks were the preferred option because they create a long-term benefit to earnings per share (EPS) by reducing the share count, “whereas a special dividend was seen as a sugar rush with no lasting impact,” UBS said.

But here’s where it gets more technical. For one thing, BHP shares are dual-listed in Australia and the UK — so which shares should it buy back?

Over the last 10 years, the ASX-listed shares have traded at a premium of around 14% to the UK. The difference has largely been attributed to the tax benefits from franking credits, which are “specific to Australian investors only”.

When a company pays tax, it earns franking credits which are held on the balance sheet. Those credits are then passed onto shareholders to avoid double taxation on both the company and its investors.

BHP has one of the biggest holdings of franking credits on the ASX ($11.7 billion). So in that sense, an off-market buyback of its Australian shares is more favourable because BHP could reduce its share count while returning cash to investors in a tax-effective manner.

UBS estimated that if BHP used the entire $US10 billion on an off-market share buyback of its ASX-listed shares, it would boost EPS by around 9%.

However, restrictions in the Corporations Act mean BHP can’t buy back shares equivalent to the full $US10 billion it has to spend.

For their part, the UBS analysts think BHP will deploy a three-way combination: an off-market buyback for ASX-listed shares of $US5-6 billion, an on-market buyback of UK-listed stock totalling $3 billion, and a $2 billion special dividend.

Such a mix would “allow the entire BHP shareholder base to participate both directly and indirectly, which in a sense would keep everyone happy”.

However, “there is no one ‘right’ answer”, they added. Here’s a summary of the pros of cons of each option:

Source: UBS

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