Deutsche Bank analysts think BHP might struggle to keep paying its dividend

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BHP fell to the lowest level since mid-2005 last week.

That weakness was on the back of continued concerns about the rout in iron ore and crude oil, the aggressive restructuring of mining giant Anglo American, and question about BHP’s dividend policy.

BHP Weekly 20 years – Reuters Eikon

That link between BHP, Anglo American and the Big Australian’s dividend policy has attracted the attention of the analysts at Deutsche Bank who wonder how long the dividend good times can last for BHP’s shareholders.

Writing in the DB Weekender, Stuart Kirk and Rinessh Bansai highlighted that:

“Only a decade ago Anglo American was worth three-quarters of BHP Billiton’s market cap. Today, its larger rival’s annual dividend payment alone could buy Anglo. Sure this tells the tale of Anglo’s ignominious fall from glory, but what does it say about BHP’s dividend policy?”

They note that BHP is reluctant to “ditch its cherished ‘progressive dividend’ policy that protects payments in cash terms”.

And they add that “unlike rival Rio Tinto, BHP did not cut its dividend even during the financial crisis”.

That’s helped BHP’s share price up until now, but things could be about to change Kirk and Bansai say (our emphasis):

BHP also benefitted from mining investors’ tendency to reward higher payout ratios with better valuation premiums. However, despite slashing its capex spend by two-thirds from three years earlier, next year’s estimated free cash flow won’t cover the planned dividend. High dividend yields are tempting, higher still and they risk becoming off-putting. Which is it for BHP’s 12 per cent yield?

It’s a great question and one shareholders will be wondering themselves.

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