BHP Group is arguably the most well-diversified mining and exploration company there is, and it is a part of every investor’s portfolio for different reasons – maybe for the stable dividends, or to decrease the overall volatility of the portfolio. BHP shares are also one of the best blue-chip stocks that trade on the ASX. The iron ore giant, BHP derives revenues from four main commodities, Iron Ore, Copper, Coal, and Petroleum. These commodities are very sensitive to the global economic outlook and activity. With economic activity increasing across the developed world, increased demand and inflation fears have resulted in high commodity prices. BHP shares are trading close to their highs posted earlier this year on the back of soaring iron ore prices.
Why is BHP Stock down on the ASX today?
The BHP share price has come under significant pressure since last week. On Thursday, the mining giant’s shares went down by more than 7% to a tad above $41 per share. This means that BHP’s shares are now down 21% since this time last month. What happened overnight? Well, there are a couple of reasons why the BHP share price is underperforming this week. One of those is further weakness in the iron ore price after curtailed steel production in China hit demand for the base metal. Not only BHP experienced such a pullback, but other mining giants went also through the same ride. Consequently, the spot iron ore price fell by 5.9% overnight to US$ 143.55 a tonne.
China, which is the world’s second-largest economy is aiming to cut steel output growth this year to 2020 levels. Although, after expanding around 12 per cent in the first half of this year, the country is now reducing its steel output by 12.2% from August to December to reach its goal. However, we remain optimistic about the rebound of iron ore prices. This will be driven by a return in demand by the end of the first quarter of 2022.
Though, the iron ore price drop might not be in fact the biggest weight on the BHP share price. It is rather the ex-dividend trading that could impact the share price more importantly. Thus, this means that the company’s shares are now trading without the rights to its upcoming dividend. As a result, new buyers of BHP shares will not be entitled to this dividend and its share price has fallen to reflect this.
In our view, despite the pullback experienced during last week, BHP remains a solid play. It is especially the case for its lucrative dividend of US$ 3.01 per share representing a solid payout ratio of 89%. The record dividend was the result of operational excellence throughout the year with a solid performance that led to consistent free cash flow generation and an efficient margin of 64%.
Looking forward, BHP is also streamlining its business. Hence, we have seen Woodside Petroleum and BHP announcing their intention to enter a merger commitment to combine their respective oil and gas portfolios. The outcome will be an all-stock merger to create a global top ten independent energy company. This move from BHP will pave the way for the resource giant to move into the Potash business and further focus on developing a net-zero company.
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