I don’t have to look far for FTSE 100 stocks offering massive dividends at the moment. Actually, the number will have gone even higher after yesterday’s market wobble. There is one company, however, that catches my eye more than most. Its dividend yield stands at 10%!

Record production

BHP Group (LSE: BHP) is one of the world’s top producers of iron order and copper. It also has interests in nickel, zinc, coal, potash, oil and gas. As one might expect from all that, it’s also one of the biggest companies in the FTSE 100.

In today’s operational update, CEO Mike Henry said that the company had hit production records at its iron ore operations in Western Australia and its coal mine in Queensland. Annual copper production at the Olympic Dam project in South Australia also rose to its highest level since it was snapped up the asset 16 years ago. 

In addition to this, BHP also said that it had “brought on four major projects safely, on schedule and on budget” over the last year. This should mean that BHP is even better placed to profit from the huge need for metals over the next decade. Renewable energy sources, electric vehicles and increased urbanisation — all of these so-called ‘megatrends’ will require its help. This is one reason why I would buy BHP today. The other is the dividends.

FTSE 100 dividend demon

Despite being a rocky ride at times, BHP shares have rewarded long-term investors. Anyone buying five years ago would be sitting on a gain of 136%. In the last year, the FTSE 100 member’s valuation has increased 21%. 

Naturally, we’re just talking about share price gains here. If the dividends distributed to shareholders throughout this time were included, the result would be even better thanks to compound growth.

Right now, the consensus forecast is that the mining giant will return 220p per share for FY21 (according to Stockopedia). Using today’s share price, that becomes a mammoth yield of 10%. For comparison, even the best instant access Cash ISA pays out just 0.5%, according to Moneysavingexpert.com.

However, no investment case would be complete without a sober consideration of risks that come with investing in BHP. 

No sure thing

Perhaps the most apparent of these is the volatility in commodity prices. This means that BHP’s share price is ultimately determined by something it can’t control. That’s true of many companies but it’s something prospective investors like me would need to feel comfortable with. As a litmus test, I’d look at the share price graph. Would I have been able to sit on my hands between 2011 and 2016 when the shares tanked?

The cyclical nature of mining also means that dividends can never be guaranteed. In fact, last year showed that payouts can be the first things to be cut by any company when times get tough.

Even if they’re not wiped or suspended, they can vary from year to year. Obviously, I’d also prefer a company to be hiking its cash returns annually. Unfortunately, that’s not been the case with the FTSE 100 miner. The general direction has been up but there’s been some variability along the way.

This being the case, I think it’s vital that I invest in a number of stocks from other sectors to give myself a better probability of growing my income stream over time.

The post This FTSE 100 stock pays income of 10%! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The big question

Reading through MoneyWeek executive editor John Stepek’s (highly recommended) new book, The Sceptical Investor, I’m reminded of what I believe is one of the most important questions to ask whenever you’re considering purchasing a new stock.

Regardless of which company we’re talking about (Stepek uses mining giant BHP Group in his example), you need to ask yourself whether it’s going to outperform the benchmark.

While there are no guarantees in investing, if you can’t at least state why you think this is going to happen, you arguably shouldn’t be buying said stock. To answer that question, however, you first need to select an appropriate benchmark.

In his example, Stepek reflects that it can make sense to use the FTSE 100 (BHP is, after all, a constituent of the index) and then ask yourself what it is about BHP that will allow it to outperform the market’s top tier.

A response might be that miners are likely to do well going forward (perhaps due to a commodities bull market) and you don’t want your investment to be impacted by the woes of other companies in unrelated sectors. Since there are plenty of large-caps that aren’t necessarily good investments right now, there’s a logic to that.

But if you think the mining sector will outperform, then a better benchmark would surely be something like an investment trust focused on miners, he suggests.

So now a different question presents itself: Why buy BHP over a fund, particularly as the latter helps to lower risk through diversification?

To be clear, Stepek doesn’t rule out buying BHP but he does stress the importance of matching a bullish call with the “correct financial instrument” — be it in the form of individual shares or something else — if you’re going to make the most money. 

What to do instead…

If, after consideration, you feel your new favourite stock is unlikely to outperform the (most appropriate) benchmark, then it makes sense to look into ways of investing in the benchmark instead.

Since the existence of a specialist fund for particular sectors isn’t a given and the FTSE 100 could still be the best comparison, I’ll stick to focusing on exchange-traded funds here.

As they sound, these are low-cost, passive vehicles that help an investor generate the same return as the market, minus a bit of tracking error and the obligatory fees. The iShares Core FTSE 100 and the Vanguard FTSE 100 UCITS ETF are examples.

Another positive from selecting these funds is that they pay dividends, thus allowing investors to receive income for less risk than if they bought shares in specific companies instead. The funds mentioned above offer yields of 4.24% and 4.73%, respectively — lower than BHP, but still worth having. 

Bottom line? Taking the time to question whether a particular share will truly outperform its benchmark might seem (irritatingly) sensible to some, but those committed to generating the best returns over the long term should acknowledge this is a vital step to take. 

The post Found a share you love? Don’t buy until you’ve answered this vital question appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

FTSE 100 constituent BHP Group (LSE: BHP) is a great example. Shares in the world’s largest miner are up a very respectable 25% over the last year. However, if you’d had the courage to buy the stock just over three years ago when the commodity market last dropped like a stone, you’d be looking at a gain of around 200%. 

Despite the less-than-enthusiastic reaction from the market to today’s interim results, I believe those already invested should stay the course.  

Profits down

As a result of “unplanned production outages” at its operations in Australia and Chile (preventing the company from realising the $460m of costs savings it had previously forecast), BHP stated that production is now likely to be “broadly flat” in 2019.

This, coupled with a fall in copper prices and decline in ore quality, led the company to report underlying attributable profit came in at US$3.7bn — 8% lower than that reported for the previous six months. 

Underlying earnings were $10.5bn, down almost 3% from the $10.8bn achieved in the prior trading period. Margins from continuing operations also fell from 55% to 52%. 

Long term focus

BHP’s shares were trading on 12 times expected earnings before markets opened this morning. That’s a little more than top tier peers such as Rio Tinto and Glencore, but reasonable relative to the market as a whole. 

Whether the positive momentum over the last year will continue is hard to say, of course. With a market capitalisation of £95bn, the shares are certainly very unlikely to rocket. As legendary growth investor Jim Slater once remaked, “elephants don’t gallop.“

Nevertheless, there are reasons to remain bullish on BHP’s prospects both in the short and long term in spite of today’s fairly disappointing numbers. 

With regard to the former, CEO Andrew Mackenzie expects a “strong second half” will make up for the difficulties experienced in the first six months and that the company has “a portfolio of attractive development opportunities.“

Longer term, I’m inclined to think that declining stockpiles and the growing popularity of electronic vehicles could cause a very decent rise in the prices for many metals in the coming years, particularly copper. 

There’s also much to be said for BHP’s geographical and resource diversification. Unlike smaller miners, the company produces a wide range of commodities (iron ore, coal, uranium, silver, lead, zinc, uranium, gold, oil and gas) in addition to the aforementioned red metal. That doesn’t protect you from a general downturn, of course, but it does make it decidedly less risky play if you are contemplating getting exposure to the sector.

Having also disposed of its onshore assets to BP over the period and returned $10.4bn to shareholders through a combination of share buybacks and a special dividend last month, BHP should also be of interest to income hunters.

Today’s interim payout may have been kept at 55 cents per share but, with its debt pile down by $1bn (to $9.9bn) since the end of June and expected to “remain at the lower end” of its target range of between $10bn and $15bn, I see no reason why BHP won’t continue rewarding its loyal holders going forward. 

The post Don’t panic! This FTSE 100 dividend stock still looks a solid long-term hold to me appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

These companies should give you an instantly diversified dividend portfolio that should generate a steady income whatever the weather.

Steady income

BHP has transformed itself over the past few years from a struggling, inefficient mining group to what I believe is one of the best income stocks in the FTSE 100. 

The group has aggressively cut costs, which has pushed profit margins higher, and a tight control on commissioning of new projects means that the business is no longer wasting shareholder capital on expensive, inefficient projects.

These efforts are now really starting to pay off. For the year ending June 30, the company reported free cash flow of $12.5bn, which allowed management to pay a record final dividend. 

It looks as if the company will repeat this performance in 2019. Management is expecting to achieve additional productivity savings of $1bn in 2019, freeing up more capital to return to investors. The business is planning to increase the amount it spends on capital projects during 2019 and 2020 by around $1.2bn per annum, having paid down more than $15bn in debt over the past two years. But BHP has, in my opinion, plenty of flexibility to both increase capital spending and hike cash returns to investors. 

With this being the case, it is no surprise that City analysts have pencilled in a dividend yield of 8.6% for 2019

Put simply, with its global operations, strong balance sheet and cash generation, BHP is an excellent dividend investment. Manx shares many of these attractive qualities. 

Monopoly business

As the largest telecoms provider on the Isle of Man, it has a large, captive customer base, which translates into impressive profit margins. For 2017, the company reported an operating profit margin of 17% and a free cash flow of £11m. I expect the group to unveil a similar performance for 2018. Manx’s end-of-year trading update, which was published today, confirms that the firm will meet City expectations for 2018.

Looking at the update, I reckon the company will report yet another year of strong cash generation and progress towards its key goals of diversifying outside the Isle of Man and improving its offering for existing customers, primarily through the rollout of fibre infrastructure.

City analysts think the company will pay out 12p per share for fiscal 2018, rising to 12.6p for 2019. At the current share price, this translates into a dividend yield of 7.8% for 2018 and 8.1% for 2019. On top of the 7.8% yield, the shares are changing hands at a relatively undemanding valuation of just 11.6 times forward earnings. 

In my opinion, this undervalues the group’s bright prospects and cash generative business. As long as Manx maintains its leading position in its key Isle of Man market, I think this company can continue to produce steady income returns for investors for many years to come.

The post Have £3k to invest? Here’s a FTSE 100 income leader I think you should buy appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Manx Telecom. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Iron in the soul

BHP is also heavily diversified, with copper, iron ore, coal, zinc, nickel and potash assets across Australia and the Americas, as well as oil exploration and development units in the US, Australia and Trinidad & Tobago.

The group is also operating in a famously cyclical sector, as demand for metals and minerals rotate along with the business cycle. Growth has been driven by China for the last couple of decades but there are signs that its economic miracle is finally hitting reality, and this will hit the mining sector’s number one source of demand.

Heavy metals

Recent global stock market volatility has also had an impact, with the BHP Billiton share price down 13% in three months. However, as with most cyclical investments, the time to invest is when they’re down. Currently, BHP Billiton trades at a valuation of 11.1 times forecast earnings, comfortably below the 15 times seen as fair value.

That partly reflects the fact that growth is likely to slow. Company earnings rose 33% in the year to 30 June, but that’s forecast to drop to just 5% this financial year. If the global economy slips into recession next year, as some suggest, earnings could slow further.

You can wait and see if stock markets fall further, and time your purchase then. However, you will never buy a stock right at the bottom of the market. The other buying attraction for me today is that you can grab a whopping forecast yield of 6.5%, with cover of 1.5.

On your Marks

You could spread your risk by investing the other half of your £2,000 in UK high street fixture Marks & Spencer Group (LSE: MKS). This stock is also trading on a massive yield, in this case 6.3% and again, with cover of 1.5.

As you surely know, M&S has been struggling for ages. While BHP Billiton’s stock is up 45% over three years, Marks is down 42% over the same period. It has lost more than half its value since peaking at 596p in May 2015, trading at just 296p today. You won’t be surprised to hear many people have given up on it as a result.

Wage growth

Again, it’s in bargain territory, trading at 11 times earnings. The group’s troubles may have further to run, with earnings expected to drop 6% this financial year, then hold flat next year. It’s a brave investor who ventures onto the UK high street these days, although things could pick up with wages finally rising faster than inflation, up 3.1%, against 2.2% for CPI. Some kind of Brexit deal would also help.

Even if we get one, online competition isn’t going to disappear. Worse, M&S Clothing & Home lost its way years ago. Thankfully, it still has its Food, glorious food division. The income level is tasty, but of the two, I would plump for BHP Billiton.

The post Have £2,000 to invest? These 2 FTSE 100 6% dividend bargains could help you put it to work appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So we have to make our own provisions too, through company pension schemes and our own private investments. And I reckon that by far the best long-term personal investment for our retirement is buying shares in dividend-paying FTSE 100 companies.

Why go for cash, even in a cash ISA, which offers pitiful long-term returns when there are plenty of top companies paying 5% per year and more in dividends (and seeing their share prices climb over time too)?

Variable dividends

Many investors look for steady dividends which vary little year-on-year, and I think that’s a great strategy if you want your income now or you’re close to wanting it. But they can miss out on some very good long-term dividends which just happen to be more variable in nature.

Look at BHP Billiton (LSE: BLT), for example. On Wednesday the FTSE 100 miner released a positive operational update showing production going steady across its range of products. Copper production guidance for the full year has been lowered a little (though it is up over the latest quarter), and guidance for petroleum, iron ore, metallurgical coal and energy coal remain unchanged.

Costs are looking stable, and development projects are going according to plan. And that all bodes well for a predicted 7% rise in earnings per share for the year to June 2019 — and a juicy 6.9% forecast dividend yield. But what’s the downside?

Cyclic sector

Mining is a cyclical industry, and BHP and the rest of the sector are looking good now that a recent downturn in metals and mineral prices (not to mention oil) has been recovering. While BHP Billiton’s 2018 dividend yielded 5.4% (on the share price at the time), two years previously a pre-tax loss led to a yield of only 2.4%.

But if you’d bought BHP shares five years ago, you’d have accumulated a total dividend yield of 20% on your purchase price, even through a dividend dip. And reinvesting the cash would have have bought you cheap shares during the 2015-17 trough.

Big sell-off

Sometimes we see big dividend stocks going out of favour, and one of those that I like the look of is British American Tobacco (LSE: BATS). I remember an investor who some years ago gave up smoking and put the cash into tobacco shares, and he’s significantly wealthier (and almost certainly healthier) as a result.

The British American share price has been tumbling, losing a third of its value over the past 12 months. The reasons are more than the growing pariah status of cigarettes in the Western world and increasing government pressure on modern smoking alternatives, as my Fool colleague Edward Sheldon explains.

The share price crash has boosted the forecast yield for the current year to 6.2%, and that would rise to 6.6% on 2019 predictions. The company does carry a fair bit of debt due to its Reynolds American takeover, but even with that I see the shares as undervalued now. I reckon tobacco has a longer future than some people might think, and I see this as another tempting retirement dividend.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Its quick thinking has stabilised the ship and, today, the business is, in my opinion, one of the best income stocks in the FTSE 100.

Blue chip income

The primary reason why BHP has become a leading income play in my eyes is the company’s cash generation. By slashing costs and investing in productivity rather than new, expensive capital projects, management has pushed costs down, production up, and margins have expanded.

The firm’s results for the year to the end of June show clearly just how far the company has come in a few years. Free cash flow for the period totalled $12.5bn and operating cash flow came in at $18.5bn. Considering these numbers, it’s no surprise the stock has outperformed the FTSE 100 by 24%, excluding dividends, over the past 12 months. 

Alongside the full-year results, the board affirmed a record final dividend of $0.63 per share and the company is also promising to return any proceeds received from the sale of its US onshore oil assets (sale price $10.8bn) to investors. On the debt front at the end of June, BHP’s net debt had fallen to just $10.9bn, down a staggering $15bn in two years.

Any business that can both slash net debt by more than 50% while at the same time investing in operations and paying out billions to investors is worth a second look in my opinion.

But what does the future hold for the company’s distribution to shareholders? Well, analysts believe the payout will rise 11% to a new record of $1.31 (101p) for 2018, giving a dividend yield of just under 6%. This is excluding any additional capital return from the $10.8bn oil asset sale. If management does decide to return all of this cash to investors, according to my figures, the special dividend will be equivalent to 9% of the stock’s current market value. 

All in all, this income champion certainly looks as if it deserves further research.

Cheap income 

The fortunes of BHP’s peer, Glencore (LSE: GLEN), have also improved since the company’s shares plunged to an all-time low at the beginning of 2016. Quick thinking by management helped stabilise the group’s balance sheet and recovering commodity prices have acted as a tailwind for growth. 

After plunging to a loss of $5bn in 2015, analysts are forecasting a net profit figure of $7.2bn by 2018, giving earnings per share of 37p. At this level, the stock is trading at a forward P/E of 8.8.

And when it comes to dividend growth, Glencore is a much more attractive proposition than its larger peer. Analysts estimate the full-year payout will jump 109% in 2018, giving a prospective dividend yield of 4.8%. Further growth is expected for 2019. Analysts have the yield rising to 5.3% next year.

Dividends are only part of the shareholder return proposition with Glencore. The company is also returning cash to investors via share buybacks. When you include these in the total yield — the total per share sum of both dividend income and buybacks, which acts as a proxy for total shareholder return — Glencore’s total yield is currently 5% and could, according to my calculations, hit 6% next year.

The post Forget the State Pension, this surging FTSE 100 share could boost your retirement income appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In the long run, the prospects for the business seem to be risky-but-upbeat. Already this year, the company has delivered capital growth of over 20% while a number of its peers have declined in value. One such company is a FTSE 100 industry peer which could continue to underperform Sirius Minerals over the long run.

Risk/reward

BHP Billiton’s (LSE: BLT) shares are marginally lower since the start of the year. The company, and the wider mining sector, has been weighed down by a stronger dollar which has caused a degree of uncertainty across the industry. There are concerns that demand for commodities may come under pressure – especially with there being the potential of a full-scale trade war between the US and China.

Given the prospects for US interest rates and the risks for the world economy from an uncertain political outlook, BHP Billiton’s share price could underperform the wider index in the near term. However, it remains one of the most financially stable and most diversified shares in the FTSE 350 resources sector. It has operations in a number of different countries, and its balance sheet appears to be relatively sound. This could mean that it offers lower risk than many of its sector peers, including Sirius Minerals.

Growth potential

Of course, Sirius Minerals may offer higher returns in the long run than BHP Billiton. Monday’s news was the latest in a series of deals that have boosted its aggregate contracted take-or-pay sales volume to 8.2 Mtpa (million tonnes per annum). The latest deal is a long-term supply agreement with Cibra, which is Brazil’s sixth-largest fertiliser distributor group. As part of the agreement, Sirius Minerals will take a 30% stake in Cibra, in return for 95m ordinary shares in the company.

Investors seem to have reacted relatively positively to the news. However, the stock is still down from its 2018 high after it recently announced an increase in the total cost of its project. Further ups-and-downs could be ahead for the stock, with its large project and long-term timescale leading to investor uncertainty at times.

In the long run, though, the company appears to have high demand and the right plan to deliver the supply required to meet it. Financing uncertainty remains, but the latest deal seems to put it in a stronger position to find the required funding to complete the project.

As such, the company’s stock price could continue to outperform that of BHP Billiton over the coming years. The FTSE 100 diversified resources company offers less risk and impressive return prospects. But with greater risk having the potential to lead to higher returns, the outlook for Sirius Minerals may be more positive. Due to this, both shares could have investment appeal depending on an investor’s risk tolerance levels and timeframe.

The post Why the Sirius Minerals share price could outperform this FTSE 100 stock appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Peter Stephens owns shares of BHP Billiton and Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

All three firms operate in business sectors that are part of the fabric of life in most developed economies. And all three are among the largest in their market sectors, with significant market share and financial firepower.

In other words, I think there’s a strong likelihood that all three of these companies will remain in business for longer than I’ll need my pension.

Staying healthy

First up is FTSE 100 pharma giant GlaxoSmithKline (LSE: GSK). Shares in this firm have pulled back a little recently, despite the firm upgrading its full-year profit guidance in July. In my view this has opened up a potential buying opportunity.

Glaxo’s portfolio includes valuable consumer health products and a wide range of medicines. The consumer health division may be spun off at some point to leave a more focused pharmaceutical group. But whether this happens or not, I think the outlook is good for shareholders.

Cost savings and growth in areas such as vaccines are helping to restore the group’s cash flow. And a recent press report suggests that Coca-Cola might be considering a £3bn bid for the firm’s Horlicks business, which is big in India.

In my view, the stock’s forecast price/earnings ratio of 13.5 and 5.4% yield make GlaxoSmithKline a buy for income and long-term growth.

A one-stop shop

I’ve long rated commodities group BHP Billiton (LSE: BLT) as a top buy for investors wanting a reliable income from the commodities sector.

Because the firm operates in the oil and gas sector as well as in mining, investors get exposure to a diversified mix of commodities. Good quality assets and strong management mean that the firm’s profit margins are among the highest in the sector.

Net debt has fallen rapidly since the mining downturn and the group’s balance sheet looks bullet-proof to me. Free cash flow came in at £9.6bn last year, putting the stock on a cheap-looking price/free cash flow ratio of 8.3.

Strong cash generation provides good support for the dividend, which is expected to provide a yield of 6.5% this year. I rate BHP Billiton as a buy at current levels.

A moving picture

My final choice is television group ITV (LSE: ITV).There has been a lot of talk about declining advertising revenue and the shift to online subscription services like Netflix. But ITV has countered these challenges by building up its ITV Studios business, which produces programmes for the group’s own channels and licences it to other broadcasters.

Studios revenue rose by 16% during H1 and this division now generates more than half of all sales. Despite this, falling ad revenues have caused profits to slip over the last couple of years. Analysts have pencilled in a drop to 15.5p per share this year with flat earnings in 2019.

In my view, the bad news is already in the share price. I think the market will soon start to look further ahead. And with the shares now trading on just 10 times forecast earnings with a 5% dividend yield, I think it’s time to buy ITV.

The post 3 FTSE 100 dividend stocks yielding 5%+ I’d buy for a new SIPP appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Netflix. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Great figures

The trading outcome for 2018 was a good one. Underlying profit from continuing operations rose 33% compared to the previous year and net debt fell 33% to just under $11bn. Some $12.5bn of free cash flowed into the firm’s coffers, which it puts down to higher commodity prices during the period and a strong operating performance. The directors designed this year’s bumper dividend to reflect the firm’s strong trading.

During the period, the directors announced their intention to sell the firm’s onshore oil assets in the US, which will raise around $10.8bn to be returned to shareholders. It’s all part of the what has been the company’s plan to reduce operations to a “dramatically simplified portfolio of tier one assets.” Chief executive Andrew Mackenzie said in today’s report that he sees this year’s “strong momentum” continuing in the medium term “as our leadership, technology and culture drive further increases in productivity, value and returns.”

I can’t argue with its recent financial record. Earnings and cash flow have increased steadily each year since bottoming in 2016 and the share price has responded well, rising around 150% since the nadir of its January 2016 dip. But that’s part of the problem that I see with this stock. BHP Billiton is an out-and-out cyclical operation with its fortunes almost completely at the mercy of commodity prices that are out of the firm’s control. So, if you are thinking of investing in the firm now, I reckon it would be wise to consider where commodity prices are likely to move from here.

This dividend looks vulnerable to me

In the year to 30 June, the firm earned around 43% of its continuing earnings before interest and tax (EBIT) from iron ore, 26% from copper, 22% from coal and 9% from its remaining petroleum operations. If those commodities plunge, so will the firm’s earnings and cash flow. I wouldn’t treat the stock as a dividend-led investment because there’s no safety net in that approach. The dividend policy provides for a minimum 50% payout of “underlying attributable profit at every reporting period.” If the underlying profit vanishes because of depressed commodity prices, the dividend will follow.

The firm just delivered a bit of a mixed bag in terms of the outlook for the world’s economies. To me, it looks like the worldwide economic cycle is mature and BHP Billiton’s big recent profits seem to bolster that view. I reckon it’s risky to hold shares in this firm and the other big London-listed mining companies now, so I’m avoiding the stock.

The post Is it wise to invest in mega-miner BHP Billiton right now? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.