Thursday, December 11, 2014

Why I am holding off on BHP Billiton (BBL)

One of the nice things about the retail investing community is you can get ideas for companies to research from each other. We often will get a "Dividend Flavor of the Month" type scenario where a good company is found and their valuations are excellent. Someone writes about it and it spreads like wildfire. I know I've found great ideas from others and I've passed a few on myself with PETM, ROST, and RKT.

Recently I've seen people jump on board with BHP Billiton (BBL) and at first glance I can see why. Its come up on numerous screens of mine for several months this year. I've commented on BBL in many comment streams in articles but have yet to write about it myself. I aim to change that today especially with it hitting my low $40s price I have told other bloggers about. As a way of disclaimer I admit that I have not done my normal intensive research on BBL as I usually do. That will come later when I am near a time to buy.

BHP Billiton is a raw natural resource company. Oil, Aluminum, Diamonds, Iron, Manganese, Coal. They are getting into the Potash business too with a large mine in Canada being worked on. At a 5.18 EPS they now have a 8.37 P/E vs their historic 10 year average of 12. A 5.6% yield is great for a corporation and a 20% dividend growth rate is also impressive. My problem though is with their future.

Over at Sharpe Trade I talked about my thoughts on why the price of oil is dropping. The price of iron ore isn't doing very well either. Together they have cause a forward EPS estimate of 2.8... almost half of what it is now. While they have had a 20% dividend growth rate their EPS growth rate has been rather terrible at 2.5% a year. BBL started with a dividend payout ratio of 20% and grew the dividend faster then they grew the actual company. Now at a 47% payout ratio they don't have much more room to grow and if next years EPS estimates are close... we are looking at a potential 80% payout ratio. I wouldn't be surprised if there would be a dividend cut at the end of 2015 or early 2016.

The last bit of concern I have with BBL is that its spinning off assets into another company. Details haven't been revealed so who knows which of their 9 departments will go where and what that will do for growth. I don't like uncertainty with my potential new positions.

My new price target is $30. That is based on 2.8 EPS at a 12 average P/E ratio. This is NOT a market call as far as I am saying BBL WILL go down that low. I think thats a foolish game to get into. BBL could well take off as it has had a very big pullback. No, my $30 price target means that IF BBL gets that low I would consider a buy. If it doesn't it doesn't and there are plenty of other opportunities out there. One thing I have learned the hard way over the years is not to jump on something just because it has had a pullback.

I wish good luck to all the BHP Billiton longs out there. I have no stake at this time and hope it turns out well for you. I'm just going to sit this one out for now.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

8 comments:

  1. Thanks for sharing your thoughts and the price target. I have had my doubts about the company too and have held off on investing in it. I have merely skimmed the number and some didnt make sense to me...and deeper look was pending. Commodities is a tough business, no doubt and the fall in commodities reflects in the forward looking EPS.

    Best wishes
    R2R

    ReplyDelete
    Replies
    1. Hello R2R. Commodities are a very tough business. Prices can move a lot faster consumer good prices or services that other companies rely upon for their revenue. That creates a very stable EPS that commodity based companies don't get to enjoy.

      Delete
  2. Thanks for sharing Pulley. It's easy to stay quiet when you have a different opinion than the crowd. I don't like commodity businesses......and like you, I'm not expecting any dividend growth from BBL.......but, I still initiated a position earlier this week. I think the risk/reward balance is in my favor. Time will tell, but there is no harm in sitting out an investment......or to borrow a Buffett, "there are no called strikes in investing".

    Have a great night
    -Bryan

    ReplyDelete
    Replies
    1. A new position initiated here wouldn't be terrible especially if one has a long time horizon. Thanks for stopping by.

      Delete
  3. Hey man, nice to see your thoughts on this stock. I've seen quite a lot of fellow bloggers covering it because they bought it, nice to see a different perspective from you though.

    I'm about to do a bit of research on AAL on the London stock exchange, Anglo American Mining. They just entered my screening criteria for the first time this year. BHP haven't cut the mustard so far!

    ReplyDelete
    Replies
    1. I'll take a look at AAL. Looks like they are generally in the same sector. Thanks for stopping by M

      Delete
  4. Thanks for sharing your thoughts. BBL looks interesting but I decided to invest in other more attractive companies. It's definitely interesting to see a lot of bloggers all investing in BBL lately.

    ReplyDelete
    Replies
    1. The amount of bloggers and its community sharing thoughts on the same company makes for a combined better research.Its saved my bacon a few times on things that I have missed.

      Delete