After reporting a loss of $5.7-billion in the first half of its financial year, BHP Billiton cut its dividend for the first time since 2001.STR/AFP / Getty Images
BHP Billiton Ltd. is slashing its dividend. This is good news.
As painful as the cut might be in the short term, it demonstrates that management is finally recognizing the extent of its long-term challenge.
Until Monday, the world's largest miner had stubbornly stuck to a progressive dividend policy despite years of falling commodity prices. BHP had promised to maintain or increase payouts year after year, even if it cost the company billions in badly needed capital.
It was an act of hubris. Trying to strap an ever loftier dividend onto the unpredictable ups and downs of the commodity market brings to mind a certain story that involves making wings out of wax, flying too close to the sun – and you know how it goes from there.
Fortunately, BHP's story is no longer headed for a splash. The end of the company's outrageously large dividend demonstrates that chief executive officer Andrew Mackenzie has finally recognized the extent of this commodity slump and rearranged priorities to reflect what is most important in today's mining industry.
Among other things, that means putting the needs of credit-rating agencies ahead of yield-hungry shareholders. BHP has $32.5-billion (U.S.) in debt, so maintaining an elevated credit rating is vital to its financial health. Any significant downgrade would send its cost of borrowing soaring.
For now, BHP enjoys an "A" rating from Standard & Poor's and an "A1" grade from Moody's Investors Services. Those are unusually high marks for any mining outfit in the current depressed environment for commodity producers, but they are anything but secure.
When S&P lowered BHP from its previous "A-plus" rating at the start of this month, it warned that it could cut again if the swoon in raw materials prices continues. Moody's, too, has recently slapped a "negative" outlook on BHP's credit rating.
It's easy to understand the rating agencies' foreboding. Until this week, BHP had resisted the notion of conserving cash by cutting back on the $6.5-billion a year that it was paying out in dividends. It had opposed a cut even after the catastrophic failure in November of a dam at its Samarco joint venture in Brazil. The disaster killed 17 people and left BHP on the hook for what is expected to be a multibillion-dollar cleanup and compensation bill.
On Monday, BHP finally acknowledged what had it had to do. After reporting a loss of $5.7-billion in the first half of its financial year, it cut its dividend for the first time since 2001.
It says it will now tie its dividend to profits and pay out half or more of its underlying attributable profit at the end of each reporting period. For shareholders, the new interim payout works out to about a 74-per-cent cut from what they were previously collecting.
That is not pleasant, to be sure. But for long-term investors, there's the consolation of knowing that the reduced dividend positions their company to survive what BHP now admits is going be a long ordeal. "While we were prepared for lower prices across our commodities, we now believe the period of weaker prices and higher volatility will be prolonged," the company said in a news release.
There's no shame in cutting dividends if it's vital to protecting the business. Many other miners, including Rio Tinto, Anglo American and Glencore, have already slashed or suspended their payouts. Investors who used to love BHP's big dividend should now applaud its new-found grasp of reality.
Ian McGugan