DGI Adventure – 12-07-2015 Investment Anti-Thesis – BHP Billiton (BBL) – No Sale

Dividend Cycle

BBL (the UK domiciled cousin of BHP) should go ex-dividend
sometime in March of 2016. Management has not announced what the dividend will
be. The market along with many analysts are anticipating a cut; previous public
statements have indicated management is “committed to the dividend”.

BBL pays a semi-annual instead of quarterly dividend, and
the semi-annual dividend has been $1.24 since September of 2014 when it was
last raised. BHP is a dividend contender having raised its dividend a lucky 13
consecutive years. This year could very well mark the end of the streak.


I have no interest in purchasing BBL shares right now. Three
months ago
I really wanted to buy shares, but I decided to forgo the
dividend to try for a better entry point. In the interim I came up with my
investment thesis structure, and you know what? I’m glad I didn’t buy any
shares of BBL. The purpose of this post is to verbalize my investment “anti-thesis”.
The only thing I knew about BBL at that
time was that they’re big, and have a history of raising the dividend and were paying a high yield. Don’t chase yield, children. Don’t chase yield. 

Now that
I have a more systematic process of looking at stocks, I’ve changed my mind
about BBL. Time will tell if I’m right or wrong, but the only way to know is if
I document my decisions, and the process that goes into them.

Don’t get me wrong, a history of dividend increases is
important, but it’s just one metric. As good as management’s dividend intentions
may be, they need to have the cash to pay it. Period.

Could BBL maintain their dividend? I guess it’s possible.
The share price is severely depressed to the point that the current annual dividend
of $2.48 represents over a 10% annual yield. With a 10% discount rate the
current share price implies a negative DGR if it is a fair value…That’s just

Sorry, but in the current interest rate environment, there
is no such thing as a “safe” double digit yield. Let’s take a look at the
quantitative case which confirms the anti-thesis to leave BBL alone for now.

QC (Quantitative Case)

LOL (Limit Order
Logic) – No sale.

To quote myself from my post
3 months ago

Of course there’s also a chance that
$30.24/share (the intraday low on August 24
th) 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

Hahahahaha. There is so much about that statement that’s
hilarious. And scary. Maybe more scary than hilarious considering I was really
close to buying BBL in my ROTH back in September.

There is no such thing as “locking in” an 8%
yield. You buy a stock that allegedly yields 8% and hold on for dear life
hoping that it doesn’t yield that for long. It probably won’t but not because
the share price went up…jackass. Didn’t I learn
my lesson
with ARCP?

Aren’t I tough? $30/share or no deal, Mr.
Market. I want my margin of safety dammit. Some margin that was. In hindsight
it appears to have been a negative margin of safety, which in investing
parlance is…not good.

Well Mr. Market called me out and took it down to $30/share.
Then to $29, then to $28…then right on down to $23.04 which is the current
52-week low.

I had cancelled that original limit order though. I
cancelled it on September 28th about a week after I came up with my
almost final investment thesis structure. The debt is what scared me off. And
the payout ratio. And well…just about everything. BHP’s not in great shape
right now. They shouldn’t be raising their dividend. They should probably be
cutting it.

Maybe they won’t. And I’ll be wrong. Don’t worry. I’ll
continue to follow this one. Time will continue to tell.

QWaF (Qualitative
Warm and Fuzzy)

The company has a history of raising their dividend. 13 years
of consecutive increases. They’re the world’s largest publicly traded mining
company. And as the world’s largest publicly traded mining company they have a
massive exposure to commodity prices which are getting hammered right now.

Newsflash: there isn’t much warm and fuzzy.

I guess there’s some Morningstar warm and fuzzy…they rank it
a 4-star stock with a fair value of $33/share, although that’s down from
$45/share fair value at the end of August. Apparently the long-term projected
price of copper changed. Whatever. I like Morningstar a lot more than most of
the analysts, but IDK. 4-stars? Really?

CPR (Cold and Prickly

Take your pick…first and foremost…free cash flow doesn’t cover
the dividend. Maybe if debt wasn’t roughly half the current market capitalization,
I’d say the company can get by a couple years by borrowing. Apparently they’ve
been doing that for the last 3 years already though?

“Key Ratios” table of BBL from Morninstar.com – screenshot 12/7/15

Holy deficits Batman! That’s not good.

Anything else? Oh yeah. Lower commodity prices are compressing
margins. China isn’t growing like it used to…it goes on and on.

I’d like to see the dividend get back below 50% of free cash
flow, which would be a little over a 50% cut from current levels, assuming the
cash flow situation has stabilized (that’s a big assumption). That would be a
5.4% yield at the current price which would imply fair value assuming a DGR of
4.64%. That would potentially be compelling, but I don’t see any reason to buy
now with the specifics still up in the air. Plus I still have at least 2.5 more
months to make a decision before the ex-dividend date (if there is one).

So Mr. Market met my price, knew where to find me, and still
I didn’t bite. He’s probably getting frustrated with me by this point.

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