Investors have largely abandoned the coal industry in recent years, and for good reason. Many coal stocks have gone bankrupt in the past few years, due to the structural changes taking place in the United States.
Coal as a source of electricity is on the decline, as domestic natural gas production soars, and demand for renewable energy rises. But thanks to exports, coal still has a viable future. Many of the best coal stocks, including BHP Group, are still highly profitable and pay strong dividends to shareholders.
Business Overview and Recent Events
BHP Group is a huge exploration and production company of a wide range of materials, including oil and gas, minerals such as copper, gold, silver, and iron ore, and metallurgical coal. The company is headquartered in Australia and has a market capitalization of $144 billion.
BHP is a highly diversified firm. It collects over 40% of annual earnings before interest, taxes, depreciation, and amortization (EBITDA) from iron ore, and another ~20% from petroleum. Despite the decline in coal relative to other materials, the company still derives nearly 20% of annual EBITDA from coal.
The industry decline over the past several years took a disproportionate toll on BHP. The company slashed its dividend by nearly three-quarters in 2016, as commodity prices plunged across the board.
But since then, BHP stock has soared, in no small part to a recovery in coal thanks to exports. In fiscal 2018, the company generated adjusted EBITDA of $23.2 billion, the second year in a row of at least $20 billion. This is roughly double the level of adjusted EBITDA achieved in fiscal 2016.
The company saw significant production growth across its portfolio, especially in coal where production increased 4% for fiscal 2018. With its strong EBITDA generation, the company has reduced its net debt by over $15 billion in the past two years.
Along with paying down debt, BHP’s turnaround fuels a compelling dividend payout to shareholders.
Compelling Income Stock
In fiscal 2018, BHP paid total dividends of $1.18 per ordinary share. As two ordinary shares equal one ADS, the company paid dividends of $2.36 per share, which represents a yield of approximately 4.2%. This is an attractive yield for investors looking for income.
BHP has also returned to buying back stock, now that its fundamentals have recovered. Through the first half of fiscal 2019, BHP repurchased $5.2 billion of its own stock. The company generated a return on capital employed of 15% in that time, a strong result that indicates financial health.
Importantly, BHP’s dividend appears secure. The company carried a dividend payout ratio of 75% over the first half of fiscal 2019.
BHP is not a pure-play coal stock. But its diversified business profile is a strength, as it has recovered much more strongly than many other coal companies that have continued to struggle.
BHP has returned to strong free cash flow, and is paying down debt to improve its balance sheet. It also pays a compelling dividend to shareholders, making it an attractive income stock.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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