BHP Results and how to potentially profit from an $8bn loss
Last night, executives had the enviable task of announcing BHP results for the full year – a whopping $8.3bn loss. Not a small amount and the ramifications on this are just the beginning of an investor nightmare when it comes to BHP results.
The loss is one thing, and rest assured as I type, the stock is, yep, you guessed it, up almost 2.2%. However, the longer term impact and positioning of the stock is now under even greater scrutiny, than simply BHP results of minus $8.3bn for the year!
Over recent years, BHP Management introduced a progressive dividend model, quite at odds with what would typically be expected of a mining company. Traditionally, earnings have been poured into asset development and future growth, rather than a reward to shareholders in the form of an enhanced dividend.
Back in 2015 for example, the dividend yield on the stock was more than 7%, higher than 10% if you took into account the franking credit – great for retirees looking for yield when cash rates are so low. The Company’s progressive dividend plan was then touted as a “ticking time bomb” by many market participants.
The allure of course, of higher yields attracted many investors who were desperate for a higher return than the paper thin cash returns currently available in the market. Add in a franking credit and you suddenly have the perfect vehicle for Superannuation investors too.
However, this type of shift proved to be just a fad – one that came and went in double quick time. February of 2016 saw the company cut its dividend in the face of weaker earnings, and last night’s $8.3bn loss announcement saw a dividend of just 14USc/share, down from 62 US cents last year.
Where does this leave investors after the BHP results?
Well, BHP results were what they were, and not unexpected given the weaker commodity prices endured by the company. If what it costs to produce goes up, and what you receive for selling goes down, and you are the World’s biggest company at doing this, then no surprise that the losses are in the billions. But today’s market reaction underlines this was largely expected.
The longer term issue is for investors who have picked up the stock for income or yield purposes is very different. Those investors will not be getting what they want and it is time to move on.
One way of course, for getting a higher yield out of the stock would be to use the covered call strategy to generate an additional income flow from the underlying asset and with only 14 US cents per share in dividend vs 68cents currently, for the September out of the money call, the difference in return is colossal and have very little to do with BHP results! This is why it pays to know what strategies are available to you and how to use them!