It’s the same old story for BHP Billiton [ASX:BHP]. Doom and gloom surrounds the big miner because of slumping commodities. They have fallen so far that fears are circling around BHP’s ability to pay their debts.
Yesterday the rating agency, Standards and Poor’s (S&P) downgraded BHP’s credit rating. The downgrade now puts the big miner on negative credit watch. Meaning further downgrade could eventuate.
The reason for the decision, S&P said, was the recent slashes in forecasts for iron ore, oil and copper. The result of which would force BHP’s operations to fall. S&P stated in the forecast ‘BHP could see its ratio of funds from operations to debt fall to 30-40 per cent over 2016 and 2017, well below our threshold for an A+ rating.’
The downgrade encouraged a selloff of BHP shares. The big miner slipped by almost 2% in yesterday’s trade and has fallen almost 4% this morning. But some are speculating BHPs share to drop further.
Credit Rating or Dividends?
Dividends should be taken into account when choosing what companies to invest in. Some deem dividends so rewarding that whole investment strategies are based upon them. Generally, investing in companies who pay regular high dividends is always a plus.
If we take a look at BHP’s dividend payments over the last few years, the figures seem to be increasing. In the space of five years BHP has increase their dividend payments by 26.5%. It seems like great dividend growth. However it might not be so impressive if we compare it to other miners.
Rival Rio Tinto [ASX:RIO] has been able to grow their dividends by 72.1% in the same five years. Both BHP and Rio offer around 62 cents per share. Yet the difference in growth really puts a damper on BHP’s dividend policy.
A lot of doubt has surface around BHP’s inability to pay dividends. It is believed that BHP will need to make a trade off. The two options are to either maintain their credit rating or their dividend payments.
It makes sense that BHP’s credit rating would be further downgraded. BHP will be strapped for cash if they are determined to keep dividends high. Therefore BHP will have less capital to pay back short and long term debts. A spokeswoman for BHP stated, ‘BHP Billiton continues to priorities a strong balance sheet through the cycle.’
Yet it seems BHP isn’t too fussed about the downgrade. The spokeswoman goes on to state:
‘Any rating within the A band provides us with our desired level of financial strength and flexibility. Our credit rating sets us apart from our peers and will allow us to withstand and capitalise on the cycle.’
BHP believes even a downgraded version of the company still has the best credit rating in the industry. But it’s extremely difficult to have the best of both worlds. BHP wants to maintain a ‘solid A credit rating’, stating it as a top priority. If this is the case then spending, such as dividend payments, may be sacrificed.
BHP’s next scheduled dividends payment will be 31 March and if dividends are cut, share prices might follow suit. If BHP does cut dividends, which is entirely likely, then it will be the first time in decades.
With not much time to act, a dividend cut is looking more certain each day for BHP. The big miner has tried to stay positive, saying they intend to ‘capitalise’ on the industry downturn. Yet if BHP’s aim is to acquire smaller mining companies they could be missing the point.
S&P downgraded BHP’s credit rating due to lacking cash to pay back their debts. An acquisition would only add to the problem of a cash staved balance sheet and mounting debts.
Morgan Standley analyst, Adrian Prendergast, said BHP’s dividend cut was ‘not a certainty’. Yet Bloomberg is estimating dividend yield to decline by 2.73% for 2016. Investors need to make up their own minds because in two months’ time BHP will either cut dividends. Or S&P will cut BHP’s credit rating.
Junior Analyst, Money Morning
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