If you follow the general consensus, blue chip stocks are supposed to be more stable than other stocks in the market. Yet over the last five years, Australia’s largest miner (and second largest stock on the ASX) — BHP Group Ltd [ASX:BHP] — has been anything but.
Take a look at its share price and you will notice that it almost forms the perfect ‘V’. Trading just under $40 back through 2014, its share price collapsed to near $14 running into 2016, before recovering (almost tripling) — trading as high as $42 in 2019.
Why did the BHP share price do this?
There were two main catalysts that led to the demise of BHP’s share price. First, iron ore prices came back to Earth after hitting record highs. This, along with a reduction in volume led to lower revenue and profits for BHP.
The other hit came from the collapse in the oil price over this period — a cornerstone of BHP’s product suite.
Throw in a US-based activist investor agitating for big changes, and the disastrous and tragic Samarco tailings dam disaster, BHP had plenty to deal with over this time.
The recovery in BHP’s share price, however, began back at the start of 2016. Increased iron ore production — along with higher prices — has helped add more to BHP’s bottom line.
Plus, the abandonment of its progressive dividend policy has also helped BHP hold onto more of its cash. Add in the sale of its on-shore gas and oil business in the US for around US$10 billion, plus a recovery in the oil price from its 2015 low, and you can see why BHP has regained its momentum.
What now for BHP?
While a rise in the iron ore price (and expanded production) has been a boon to BHP, its future prospects are now less certain. Once again, its biggest market, China, looks to be coming off the boil.
And while the oil price has recovered somewhat, it is still a long way from when it was trading above US$100 a barrel back in 2014.
Then, of course, is the ongoing trade war between the US and China. As a key commodity supplier to the global market, BHP is vulnerable to any weakening of the global economy.
Another factor is the length of the current bull market. In the US, it is now in its 10th year. If the US was to go into recession — despite the Federal Reserve reversing its monetary policy — BHP could once again see its share price under pressure.
For Money Morning
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