DGI Adventure – 09-08-2015 No Sale

BHP Billiton’s UK domiciled cousin, BBL, goes ex-dividend
tomorrow, which means anyone who didn’t own shares by the end of business today
will not be receiving the $1.24/share semi-annual dividend that will be paid
later this month on September 29th.
Assuming the dividend is maintained, the next opportunity to be a
shareholder of record won’t come for another six months. There are plenty of
investors who are worried about that next dividend, which is a big part of why
BBL’s share price has fallen over 20% year to date. I happen to be in the camp
that believes the dividend is safe, but I didn’t buy any shares today.

The share price closed on Friday at $32.24/share. Over the
long weekend I put in a limit order to buy 35 shares at $30.05/share which
means it would have had to drop over 6% today for my order to have been filled.
Instead, the share price shot up 4.5% to close at $33.71. Mr. Market was in a
pretty good mood today, and BBL enjoyed a pretty big daily gain. My limit order
went unfilled, and will be automatically reduced tomorrow because of the
ex-dividend date.

That was a pretty aggressively low limit. Why such a low
limit? Well even though I believe the dividend is safe, I’m not convinced the share
price’s volatility is over. The current sentiment in the market is pretty
bearish for BBL. As much as the price has fallen recently, the PE ratio is
still very high due to very weak earnings. The current PE is well above BBL’s 5
year average. For that reason I want as much margin of safety as I can get,
which means a very aggressive limit order. As everyone worries about China and
commodity prices and interest rates (oh my!), it seems like a good bet there
will be a lot of volatility for the next six months. I expect BBL to get
whipsawed around. So another 10%+ downswing isn’t out of the question. BBL
hasn’t traded hands for $30/share since the depths of the great recession. And
back then (2009) it only paid $1.64/share in annual dividends. I would be
pretty damn happy to pick it up around $30/share. Truthfully it would be good
to pick it up at its current price. A reverse dividend discount model analysis
requires a long term dividend growth rate of a mere 2.6% for the current market
price to reflect “fair value”. Since those dark times back in 2009, BBL stared
their 70% payout ratio in the face, cut costs, improved operations, increased
earnings and proceeded to raise their dividend by an annualized rate of 10% for
the next 6 years. Of course China was growing like a teenage boy for those 6
years too, but instead of milk, China consumes iron ore. So who knows? That’s
why I want a big margin of safety.

This is the sort of thing that gets you excommunicated from
the Church of Buy and Hold. If it’s a good investment at $30/share, it’s a good
investment at $33/share. Hell, if they only sport a long term DGR of 4% it’s a
good investment up to $41/share. I should just buy BBL.

Maybe. But if I buy it tomorrow, I’ll have to sit on a dead
investment for six months before the next dividend opportunity. I guess I feel
like the chances of Mr. Market having a bad day in the next six months and
randomly deciding that $30/share actually is a fair price are pretty decent.

Of course there’s also a chance that $30.24/share (the
intraday low on August 24th) was the “bottom”, and I’ll never get to
lock in that 8%+ yield I was hoping for. Time will tell. I’m going to stick to
my guns. I want it for $30/share. That’s my price…Mr. Market knows where to
find me.

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