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BHP Billiton plc (ADR) (BBL)’s Potential

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LONDON — Dividend income accounts for about two-thirds of total returns — the actual rate of return, taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

BHP Billiton plc (ADR)I am currently looking at the dividend prospects of BHP Billiton plc (ADR) (NYSE:BBL) and assessing whether the company is an appetizing pick for income investors.

How does BHP Billiton plc (ADR) (NYSE:BBL)‘s dividend history stack up?

Metric 2009 2010 2011 2012
FY dividend per share $0.82 $0.87 $1.01 $1.12
DPS growth 17.1% 6.1% 16.1% 10.9%
Dividend cover 2.4 2.6 3.9 2.9

Source: BHP Billiton company accounts.

BHP Billiton plc (ADR) (NYSE:BBL) has managed to keep dividends rolling higher in recent years, even in times of severe earnings pressure — dividend hikes in 2009 and 2012 came despite respective earnings-per-share declines of 30% and 18% for those years.

Dividend rises have been relentless, if erratic, while a mix of earnings volatility has also seen dividend cover subsequently shake during the period. However, coverage has still remained above the security benchmark of two times prospective earnings.

What are BHP Billiton’s dividends expected to do?

Metric 2013 2014
FY dividend per share $1.10 $1.25
DPS growth (1.8%) 13.6%
Dividend cover 2.1 2.2
Dividend yield 3.8% 4.3%

Source: Digital Look. Exchange rate: £1=$1.51889.

City analysts are expecting a 29% EPS slide for the year ending June 2013 to be accompanied by a slight drop in the annual dividend. However, an anticipated 25% earnings snapback in 2014 will result in a strong resumption of dividend growth, according to estimates.

BHP Billiton plc (ADR) (NYSE:BBL) carried out severe restructuring of its senior management team earlier this month, stripping out a layer of management as part of its bid to improve operational efficiency and slash outgoings. The steps included the appointment of nonferrous-metals head Andrew Mackenzie as chief executive — he replaces former head Marius Kloppers, who oversaw heavy cost increases in recent years as expenditure and costs spiraled.

The mining giant saw underlying earnings before interest, depreciation, taxes, and amortization drop a hefty 29.3% in 2012 to $13.2 billion, with total revenue slumping 14.1% during the period to $32.2 billion. The company has since announced severe capex scale-backs and divestments in an effort to improve the balance sheet and provide a stable platform for future growth.

How do BHP Billiton’s dividend prospects rate against the competition?

Prospective Dividend Yield Prospective P/E Ratio
Mining 256.1% 15.9
FTSE 100 3.1% 15.9

Source: Digital Look.

BHP Billiton plc (ADR) (NYSE:BBL) currently trades on a P/E readout of 12.7 for 2013, trading at a discount to both the FTSE 100 and its mining counterparts. It also beats the U.K.’s main share index in terms of forward dividend yield, although a handful of companies distort the projected figure for BHP Billiton’s fellow dirt-diggers.

Instead, it is worth comparing the firm’s metrics with other diversified miners. Glencore Xstrata PLC (LON:GLEN) carries a prospective yield of 3% and trades on a P/E rating of 11.8. And Rio Tinto plc (ADR) (NYSE:RIO) deals on a forward earnings multiple of 7.9 and boasts a potential yield of 4%.

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