There is a great article in today’s Wall Street Journal regarding BHP’s decision to hold on to its cash rather than waste it on vastly increased dividends.
BHP Billiton may have brushed off the recession, but investors are now grumbling at the mining giant’s reluctance to indulge them with fatter dividends and a big share buyback. But BHP boss Marius Kloppers is right to stand his ground. With the global economic recovery far from assured, maintaining a cash cushion to protect long-term capital spending and to be able to pounce on acquisition opportunities make sense.
Despite the recession, BHP reported underlying earnings down just 6% in the six months to June 30 thanks to buoyant copper prices and record iron ore and coal output. As a result, net debt is now equivalent to a little more than a third of annualized earnings before interest, taxesl depreciation and amortization, a fraction of its nearest rivals. Yet Mr. Kloppers raised the interim dividend by just two cents to $0.42. There is no plan for more share buybacks. Nor has BHP taken advantage of industry distress to make substantial acquisitions during the downturn.
I haven’t reviewed BHP for this site yet but, in general, I don’t think it is a very good investment. The reason is not because of their lack of dividends though but rather their lack of solid sustained growth in the categories that matter:
- Sales
- Earnings per share
- EBIT
- Price per Earnings
Taking profits from the corporation to give to the owners doesn’t make a better company – it makes owners happy in the short term but it doesn’t make the company better in the long-term. While I don’t begrudge a corporation the right to pay dividends, I do think that they should only do this when they have got the rest of the company in order. In the case of BHP, they should spend some of that cash on improvements that will make BHP a Good Company.