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Stock of the week: BHP Billiton

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Graham Spooner, investment research analyst at The Share Centre, picks BHP Billiton as stock of the week. 

This week’s share of the week is BHP Billiton, the largest mining company in the world with a focus on five commodities: iron ore, coal, copper, petroleum and potash. The mining sector has experienced a tough few years owing to a relatively weak global economy. BHP Billiton has maintained a more balanced portfolio than others in the sector and it is expected that the recent improvement in oil price should serve to bolster the group further.

Big mining groups such as BHP Billiton recently struggled due to a decline in demand for commodities from China; this forced mining groups to aggressively cut back on large scale investment programmes, sell assets, drastically cut costs and focus on balance sheet repair. Off the back of its restructuring programme leaving the group with far more streamline operations and improvement in commodity prices, we have seen a  recovery in the likes of BHP Billiton.

The half year results in February followed in a similar pattern to the full year results; the leading global resources company reported profits of $2bn which included a $2bn exceptional loss related to US tax changes. Operating profits were much improved compared to the same period last year reflecting higher commodity prices and solid operating performance. Free cash flows rose to $4.9bn and the net debt reduced to by $900m to $15.4bn.

The restructuring is taking BHP Billiton back in the right direction and we believe that the worst may be over for the commodities sector. Investors should be attracted to the solid dividend pay-outs, the group have adopted a 50% pay-out ratio for the dividend which should help them ride through the volatile commodity cycle better. We reiterate our ‘buy’ recommendation on the stock for investors seeking balanced return and willing to accept a medium to high level of risk.

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