bhp billiton poised for record profit, page-43

Nice read.

What to do with BHP spare billions?
Barry FitzGerald
August 16, 2008

IT'S a nice problem: what to do with the $US37 billion ($A42.8 billion) spare cash that BHP Billiton is forecast to accumulate in the next three years as it makes huge profits from bumper contract prices for iron ore and coal.

The first such profit will be announced on Monday and according to market consensus, BHP's June-year result will be $US15.4 billion. That compares with $US13.4 billion for 2006-07.

Shaw Stockbroking, one of the few brokers not in conflict making forecasts because of BHP's $165 billion bid for Rio Tinto, believes BHP's profit will be $US15.8 billion before another surge to $US25.2 billion for 2008-09.

Shaw estimates BHP will generate surpluses for the next three years of between $US11 billion and $US14 billion after capital expenditure, reducing net debt to zero and after paying dividends.

"We forecast $US15.1 billion in dividends are paid out over the same three years," Shaw said in a research note to clients. "This results in some $US37.4 billion in excess cash available for either additional growth projects in excess of that currently ratified, improved capital return to shareholders and/or acquisitions."

While there is no doubt BHP will be swimming in cash, it has earmarked $US30 billion for a share buyback within a year of its Rio bid succeeding. The Rio acquisition would also bring with it about $US45 billion of debt. But Shaw does not believe BHP will succeed with its Rio tilt, saying it believes the European Commission will block the move. Even so, the broker says one use of BHP's surplus cash could be the addition of a cash "sweetener" to BHP's 3.4-for-1 scrip offer for Rio.

It also suggests that higher dividends should be considered. Lifting the payout rate from 20% to 50% would put BHP on a 6.8% yield. Shaw said an attractive yield was a missing investment characteristic of BHP.

"BHP has one of the lowest yields among all major ASX listed companies," it said.

Shaw said it could be argued that the "time has come for BHP to revise its dividend policy from one of gradual incremental dividend increases to a policy that better reflects the impressive cash generation capabilities of its business".

Another use for the cash would be to buy back 6.5% of shares for each of three years, which would lift earnings per share by 18% by the third year.

BHP shares closed 72¢ weaker at $37.98, giving its conditional bid for Rio a value of $129.13 a share. Rio closed $2.80 lower at $115.15 (3.03 BHP shares), leaving it at a 12.1% discount to BHP's bid price.

Rio's profit for the June half is due to be released on August 26. The consensus is for about $US5.1 billion profit, up from $US3.52 billion in the previous corresponding period and underpinning expectations for a full-year profit of more than $US12.5 billion.

The reporter owns BHP shares.