BHP share price pops on bumper profits and record dividend

BHP profits hit highest level since 2011

BHP posted underlying profit of $21.3 billion in the year to the end of June, up 26% from the year before and hitting its highest level in over a decade. EPS soared to 610.6 cents from just 223.5 cents and smashed past the 443.0 cents forecast by analysts.

Iron ore production was flat from last year and that, twinned with lower prices as demand from China cooled, meant earnings from this commodity fell. However, earnings from the likes of copper and coal soared as lower output was offset by significantly higher prices. BHP earned 9% more for each pound of copper it sold during the year, while coal prices more than trebled.

BHP slashes debt and pays record dividend

Free cashflow hit a new record of $24.3 billion, up some 39% from last year as a result of higher commodity prices and a tight control over costs. That allowed the company to slash its net debt pile to just $333 million by the end of the financial year, down an impressive 92% from the $4.1 billion it had on its books 12 months earlier. It has $17.2 billion of cash and equivalents to play with.

That gave BHP the resilient balance sheet needed to up distributions. BHP is paying a final dividend of $1.75 per share, taking the total payout for the year of $3.25. That is up from the $3.01 paid out last year and marks a new record annual distribution for the miner. Notably, that is in addition to the 386.4 cent payout made to shareholders after merging its petroleum business with Australian firm Woodside.

Together, all these payouts meant BHP returned a staggering $36 billion to shareholders during the year, made up of $19.6 billion from the Woodside deal and $16.4 billion in dividends and buybacks.

BHP in ‘great shape’ as it enters new financial year

‘BHP enters the 2023 financial year in great shape strategically, operationally and financially, and well prepared to manage an uncertain near-term environment. During the year, we unified BHP's corporate structure, merged our Petroleum business with Woodside, completed the sales of our interests in the BMC and Cerrejón energy coal assets, and decided to retain and operate our New South Wales Energy Coal business until mine closure in 2030. We have improved our platform for growth through the Jansen potash project, iron ore and copper,’ BHP said.

BHP said it is in growth mode and focused on its ‘future facing commodities’ like copper, iron ore, nickel and potash, which have strong growth fundamentals and are key to growing the global economy while also meeting climate change goals.

It is already expanding an area of its Western Australia Iron Ore (WAIO) project to boost production to over 300 million tonnes per year over the medium term and said it will consider further options in the new financial year that could take the project to 330 million tonnes. WAIO has achieved record sales for three consecutive years and produced 282.8 million tonnes of iron ore in the financial year.

Elsewhere, BHP said it is hoping to launch the large Jansen potash project in Canada into production in 2026, rather than 2027. Potash is mostly used as a key component of fertilisers and helps revive soils that are deficient in minerals, making it an important commodity that allows the agricultural industry to rejuvenate depleted land. It said it is also assessing its options in nickel and copper.

This will lead to a rise in capital and exploration expenditure. Having spent $6.1 billion during the year, BHP’s growth ambitions will lead to its budget rising to $7.6 billion in the 2023 financial year and $9.0 billion in 2024.

BHP: China to provide stable commodity demand

BHP said it expects China, which has been grappling with Covid-19 restrictions, troubles in its property and construction markets, and wider macroeconomic headwinds, to ‘emerge as a source of stability for commodity demand in the year ahead’ as the government introduces new support for the economy.

Henry is confident that China’s recovery from the damage caused by the latest Covid-19 restrictions will provide a tailwind for demand. That is important considering China is the world’s largest consumer of commodities and a hugely important market that accounts for the majority of BHP’s revenue.

The Covid-19 restrictions have once again derailed the unbridled growth delivered by China over recent decades. BHP’s bullish tone comes after Chinese officials abandoned their goal to deliver 5.5% growth in 2022, instead adopting a line to deliver the best growth possible in tough conditions. We also saw China’s central bank cut interest rates this week after a slew of disappointing data showed retail sales, industrial output and investment all slowed far more than anticipated in July.

Notably, its rival Glencore said earlier this month that it also expects China to deliver a strong recovery going forward, while Rio Tinto said China has the resources needed to sort out the challenges in its economy and property markets.

BHP warned that advanced economies will see a slowdown in demand as tighter monetary policy, inflationary pressures, supply chain disruption and labour shortages all bite, warning that Europe’s energy crisis is ‘a particular point of concern’.

Is BHP looking for M&A opportunities?

BHP also hinted that more M&A could be on the cards after its recent AUD8.3 billion bid for Australian firm OZ Minerals was rejected. The board unanimously agreed that the offer undervalued the company and said it has a unique set of copper and nickel assets.

BHP CEO Mike Henry did not rule out a second bid but described OZ Minerals as something that would be ‘nice to have but not a must-have’, adding it was ‘disappointing’ that the company chose not to engage with its offer.

Still, the offer for OZ Minerals and the completion of its petroleum merger with Woodside, combined with record cash flow and a significantly stronger balance sheet, shows that BHP is in a solid financial position and actively seeking out M&A. Henry said BHP ‘has lots of levers for growth and M&A is just one of those levers’.

BHP shows diversification pays

The results out from BHP are impressive across the board. Profits are soaring, shareholder returns are at new highs, the balance sheet is prepped for growth and the outlook remains rosy, although clouded. Ultimately, BHP has managed to maintain momentum following the record performance delivered in 2021.

The results follow the record numbers out from Glencore earlier this month, when it too reaped rewards from the surge in coal prices. This allowed it to pay a special dividend and launch a new share buyback, although markets remain wary that the company is currently being driven by coal – a commodity that Glencore doesn’t see as part of its long-term future. Its huge Marketing division that trades commodities around the world also performed well amid volatile energy markets.

The diversification of BHP and Glencore paid off considering its rival Rio Tinto halved its interim dividend last month after profits slumped in the first six months of 2022 due to the drop in iron ore prices. Rio Tinto makes around two-thirds of its earnings from iron ore and saw earnings plunge 29% in the first half of 2022 from the record figures delivered the year before, prompting it to halve its dividend and curtail expenditure. Although things have become much tougher in 2022 compared to 2021, Rio Tinto’s earnings remain elevated compared to pre-pandemic numbers and its interim payout was still the second highest on record.

Where next for the BHP share price?

BHP’s shares rose 4.1% in Australia today and its shares in London are trading 4.4% higher at 2,336.5p, marking a new six-week high.

The stock has surpassed the 2,328p level of support that emerged during the first two months of 2022 today, which is the immediate test. Trading volumes remained subdued over the past month but have seen a notable uptick recently. The five-day average volume at time is more than double the 10-day and 30-day averages, and we have seen a further rise in recent days that has seen volumes return close to the 100-day average. That suggests the stock can continue to gain momentum if volumes remain healthy, supported by the bullish RSI. The stock is now targeting the 200-day moving average at 2,394.5p.

However, upside potential could be limited. The 20 brokers that cover BHP currently have an average target price at 2,345.34p, which leaves little reward for new investors at current levels. The jump today provides room for the stock to come under pressure but keep the recent uptrend that started a month ago intact. We could see the stock slip back toward the 50-day moving average at 2,266p if it comes under renewed pressure but any significant move below here could break the uptrend and bring 2,175p into view, which has proven to be a significant level of both support and resistance in recent years.

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