Recent Buy: BBL

Nov 20, 2014: Bought 57 shares of BBL at $50.20 per share.

BHP Billiton is a diversified natural resources company and one of the world's largest producers of major commodities, including aluminum, coal, copper, iron ore, manganese, nickel, silver and uranium. BHP Billiton is a dual listed company comprising of BHP Billiton Limited (BHP) and BHP Billiton Plc (BBL). I'm buying shares in BBL, offered as American Depository Receipt (ADR) shares on the NYSE.

BBL is an existing holding, so I'm adding shares following substantial recent weakness in the stock price. I first initiated a position in June 2013, buying 43 shares at $58.39 per share and with an initial yield on cost (YoC) of 3.90%. With this buy, I'm averaging down to a per share price of $53.72. This time, initial YoC is a very respectable 4.94%.

BBL has traded in a range between $50 and $70 per share for more than three years. In August, the company announced demerger plans, which, along with concerns over the lack of a new buyback program, has sent the stock down about 28% to date.  This weakness provides an excellent opportunity to buy more shares.

Despite the recent drop, BBL is still outpacing the S&P 500 handily over a 10-year period:

Source: Scottrade

Analysis of BBL

BBL ranked third on my November dashboard of dividend growth stocks. My fair value estimate for BBL is $64.50, so I'm picking up shares at a discount of about 22%. For comparison, Morningstar's fair value estimate is $70, while S&P Capital IQ's fair value estimate is $59. Zacks Investment Research has a target price of $48.40.

The following table provides some key statistics, with highlighted values relating directly to my selection criteria:

BBL passes the following selection criteria:

• A streak of at least 5 years of dividend increases (12 years)
• Dividend yield exceeds 2.75% (4.94%)
• Chowder Rule: Dividend yield plus 5-year CAGR exceeds 12% (15.4%)
• Debt to equity ratio less than 50% (44%)
• Price to earnings ratio (P/E) is less than 20 (TTM 10.05x and Forward 18.79x)
• P/E to annual earnings per share growth (PEG) ratio is less than 2 (1.79)
• 5-year compound annual growth rate (CAGR) is at least 10% (10.63%)
• Reasonable confidence in continued dividend growth (Yes)
• Price discount is at least 5% of fair value estimate (28.49%)

BLL only one of my selection criteria:

• Earnings per share (EPS) percentage payout is less than 40% (47.9%)

Based on these statistics, BBL earns 6 stars out of a possible 7: (******-)

Other ratings for BBL

Zacks Rank  4-Sell  S&P Capital IQ's Stock Report  (****-) Buy   MorningStar Rating  (****-)  The Motley Fool's CAPS Rating  (****-)

Dividend Prospects

BBL has an impressive dividend growth record with a streak of 12 years of increased dividends. Over the past five years, the company has increased its dividend at an annual rate of 10.6%. The most recent dividend increase, announced on 19 August and paid on 23 September, was 5.08%. At my purchase price of $50.20, BBL yields 4.94%. Presently, the payout ratio is 47.9%. Due to exposure to highly cyclical commodity markets, BBL's results do vary significantly from year to year. Generally speaking, though, earnings are increasing over time and BBL should be able to continue growing its dividend even while earnings fluctuate.

Data source: gurufocus.com

The question is how the announced demerger plans will affect shareholder return. On 27 October 2014, BHP Billiton explained how they plan to maximize value and shareholder returns by reducing operating costs and improving capital efficiency. The company's CEO, Andrew Mackenzie, said:

"We are confident that our productivity drive will be accelerated by the demerger proposal we announced in August. A simpler portfolio, focused on our 19 core assets, will retain an optimal level of diversification while generating even stronger growth and margins.

"We see our capital management strategy as a precondition to maximizing shareholder value. It has allowed us to invest through the cycle and grow our dividend at an average annual rate of 17 percent over the last decade without interruption. 

"Our strategy, including our commitment to a strong balance sheet, has worked well for our owners. We have delivered a total shareholder return of 394 percent over the last decade including US$64 billion in dividends and buy-backs. By safely improving operating and capital efficiency we will maximize value and increase cash returns to our shareholders. Improving our competitiveness will benefit shareholders and the local communities and economies in which we operate".

So, the proposed demerger could provide a catalyst for shareholder return through increased focus on operating and capital efficiency, while a new, independent company could provide additional upside by itself.

Concluding Remarks

BHP Billiton is the largest diversified natural resource company in the world. The company has a strong track record of paying and raising dividends despite the cyclical nature of its business. 

A proposed demerger has created some uncertainty in the market, sending the share price down by about 28%. This weakness provides an excellent opportunity to buy more shares, as BBL still have strong fundamentals. 

The demerger, if finalized would result in two independent companies. BBL shareholders would receive shares in the new business. On 16 October 2014, BHP Billiton confirmed that it will pursue a standard listing in London and admission to trading on the London Stock Exchange for the proposed new company, alleviating earlier concerns that shares may solely trade on foreign exchanges. 

57 shares of BBL represent $141.36 of expected annual dividend income, which increases DivGro's projected annual dividend income to $5,458.37.