Shares in former FTSE 100 dividend champion BHP Billiton (LSE: BLT) have slumped by around 10% year-to-date as investors have given up on the company’s rally, which began at the beginning of last year.
However, this decline might be a great opportunity for investors to buy into the recovering dividend stock as it looks to restructure its operations following a fight with activist hedge fund Elliot and benefits from rising commodity prices.
At the beginning of April, activist hedge fund Elliott Associates demanded that BHP overhauls its dual-listed structure and petroleum business. Management immediately rebuffed these requests, but Elliott has not backed down. At the beginning of May, Elliott launched another attack calling for BHP to undertake a formal open review of its oil unit, citing “extremely broad and deep-rooted support” among shareholders.
Elliott has a history of getting its way, so I wouldn’t be surprised if, over the next few months, BHP’s board bows to the fund’s pressure and undertakes a review of its oil and gas business. This would be beneficial for investors. While this division provides diversification, it has also destroyed an estimated $23bn of value. According to City analysts, BHP’s shale business could be worth around $10bn based on current deals in the sector.
BHP’s battle with Elliott is just one of the reasons why the company looks attractive today. Over the past few years, the company has been set on lowering costs, improving overall group efficiency and paying down debt. As a result, BHP is a very different company to what it was just a few years ago.
Indeed, the company’s half-year results for the year to December 31 2016, show clearly that the firm has now become a cash cow.
For the period, the company produced a free cash flow of $5.8bn, allowing management to reduce net debt from $26.1bn to $20.1bn in just six months. This strong cash flow also gave management the confidence to add an extra $0.10 to the group’s regular dividend payout of $0.30 for the period.
Better payout policy
BHP’s new dividend policy of paying excess cash to investors on top of a regular payout is extremely prudent. Based on the group’s current level of cash generation, investors expect the company to pay out 62.5p per share to investors for the fiscal year ending 30 June 2017, giving a dividend yield of 5.3%. Alongside this hefty payout, the shares also look cheap, trading at a forward P/E of 11.2.
So shares in BHP look cheap and support a market-leading dividend yield, and if Elliott gets its way, investors could be set for a large one-off special payout when the company sells its shale oil division.
All in all, after recent declines, considering the company’s current valuation and dividend prospects, it looks as if it could be time to buy BHP before the market realises the group’s potential.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.