Enter the fire! I love days like this past Monday, when the S&P 500 fell more than 2%. Although not a noticeable pullback on its own, there were quite a few equities on my watch list, and in my own portfolio, that fell much further than this. Drops of 4-5% or more in one day tend to get my attention, and I love few things more in life than getting a piece of a high quality company when its on a fire sale. Just like I’d love to see chicken or bread 5% cheaper at the grocery store, I love to see stocks I was already likely to buy on sale. Cheaper shares means my capital goes further, because the same amount of capital can effectively buy more passive income via more shares. And cheaper shares also obviously means that you’re setting yourself up for a greater total return over the long-term. Win-win!
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 25 shares of BHP Billiton PLC (BBL) on 4/15/13 for $55.32 per share. I purchased these shares after a dip of over 5% on Monday. I love being greedy when others are fearful.
This purchase adds $57.00 to my annual dividend income total based on the current $1.14 semi-annual dividend. BBL currently pays semi-annual dividends like many European companies, with the interim dividend being paid in March and the final dividend being paid in September. The great thing is that BBL declares and pays the dividend in dollars. Also, because of a tax treaty with the U.K. there are no foreign taxes withheld on the dividends. BBL also usually raises the dividend with the final dividend payout, so the effective yield of 4.12% I received on my purchase is set to rise later this year!
BHP Billiton is the world’s largest publicly traded miner and diversified natural resources company. They are engaged in minerals and oil/gas exploration development and production. They are among the world’s top producers of commodities like aluminum, copper, energy coal, metallurgical coal, manganese, iron ore, nickel, silver and titanium materials. They also have significant investments in oil and gas.
I’m not naturally a huge fan of investing in commodities directly, other than oil. I’ve made my case for why I’m not a huge fan of owning gold, and commodities as a whole tend to be very cyclical. Overall, I prefer secular stocks where the underlying company sells products or services that people want or need on an everyday basis. Commodities, while certainly in great demand most of the time due to increasing scarcity among many basic materials, tend to fluctuate greatly in value based on where the overall economic business cycle is at. And right now, BHP Billiton has concerns over slowing Chinese demand for many basic materials, most notably iron ore. BHP scrapped a $80 billion 5-year expansion plan last year due to management’s view of a cooling global economy and commodities market.
However, I was drawn to this investment for a number of reasons. First, the company is the largest of its kind and its scale is a great advantage when you’re talking about mining vast stretches of land across many countries. They operate in over 100 different locations worldwide. They are also diversified across many different commodities, although iron ore does account for about 37% of profits. Also, as a dividend growth investor I like to see a history of fairly substantial dividend growth. BBL sports a 10-year dividend growth record with a dividend growth rate over the last 5 years of 19%. The entry yield of 4.12% is also very attractive in this low interest rate environment. The balance sheet is also attractive, with a debt/equity ratio of 0.4. They have a S&P credit rating of A+. Also, the aforementioned cancellation of a large 5-year $80 billion expansion shows management is prudent and careful about capital allocation. I’d rather not see management engage on a massive spending spree for expansion if prices on the materials it mines for are falling.
Revenue is up from $39.4 billion in 2007 to $73.1 billion in 2012. That’s a CAGR of 13.16% over that 5 year period. EPS is up from $4.58 in 2007 to 5.77 in 2012. That’s a CAGR of 4.73% over that same period. The dividend payout ratio currently stands at 39%, which leaves plenty of room for growth in the future.
BBL prides itself on operating large, long-life, low-cost, expendable, upstream assets diversified by commodity, geography, and market.
While I wouldn’t want a large portion of my net worth in this company, I feel confident owning a small piece of the world’s largest natural resources company as part of my diversified portfolio of high quality dividend growth stocks. While the global economy has been shaky over the last few years, I can’t imagine scarce resources not becoming more valuable over time as they continue to become more and more rare and as the global population continues to rise and countries needing more basic materials to build, expand or consume energy.
It should be noted that BHP Billiton is a dual-listed entity with ADR shares trading on the NYSE under the BBL ticker and the BHP ticker. The BBL shares are the British shares (with no tax withholding to U.S. investors) and the BHP shares are Australian listed (which are taxed by the Australian government). Due diligence, as always, is required here.
I used a Dividend Discount Model to value BBL shares. I used a 10% discount rate and a 7% long-term growth rate which gives me a Fair Value on shares of $81.00. I typically use a 10% discount rate, but an argument could be made to use a higher rate to account for the greater beta (volatility) and the exposure to the commodity market. Of course, I also used a very conservative dividend growth rate (well below their average to date). The P/E ratio on my purchase price is 9.5, which is obviously attractive. Overall, I feel BBL shares are undervalued right now, which is a rarity in this market. I think a sufficient margin of safety exists with these shares, even factoring in the cyclic nature of the business.
I now have 32 positions in my portfolio, as this was an investment into a new position. This is my second holding now in the Basic Materials sector, with my purchase of shares in Air Products & Chemicals, Inc. (APD) earlier this month.
Some current analyst opinions on my recent purchase:
*Morningstar rates BBL as a 5/5 star valuation with a FV estimate of $100.
*S&P rates BBL as a 3/5 star Hold with a 12-month target price of $68.00.
I’ll update my Freedom Fund in early May to reflect my recent addition.
Full Disclosure: Long APD, BBL
What are you buying?
Thanks for reading.