Could BHP struggle to grow its dividend in FY25 and beyond?
BHP is paying its smallest interim dividend since 2017, at the lowest payout ratio in more than a decade.
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Mentioned
KEY POINTS
- BHP's interim dividend fell to its lowest since 2017, reflecting an 8% drop in first half revenues and a 23% decline in net profit due to lower iron ore prices
- The company expects net debt to rise toward the upper end of its $5-$15 billion range, partly driven by its joint venture acquisition, Vicuña Corp
- BHP's future dividend outlook is subdued, with analysts forecasting a payout ratio of 50% and limited dividend growth due to rising debt and strategic investments
BHP (ASX: BHP) is set to pay its lowest interim dividend since 2017, at the lowest payout ratio in more than a decade amid falling iron ore prices and soaring debt levels.
Against this backdrop, could BHP's longstanding position as a leading dividend stock come under pressure?
First-half at a glance
Most key financial metrics, including revenue, net profit, and net debt, were broadly in line with or slightly ahead of consensus estimates.
Group revenue down 8% to US$25.1 billion (1% below US$25.3bn ests)
Underlying EBITDA down 11% to $12.36 billion (in-line)
Underlying NPAT down 23% to $5.08 billion (1% ahead of US$5.01bn ests)
Interim dividend down 31% to 50 US cents per share (in-line)
Dividend payout ratio of 50% (vs. 51% ests)
Net debt down 2% to US$11.79 billion (2% ahead of US$11.55bn ests)
The earnings slump was largely driven by a 22% decline in average realised iron ore prices, which fell to US$81.11 a tonne. BHP’s iron ore division contributed 58% of Group EBITDA in the first half.
BHP also noted that its WA iron ore production is now expected to be at the lower end of its 282-294 million tonne guidance range following Tropical Cyclone Zelia in February 2025.
Outside of this slight revision in iron ore output, FY25 guidance remains unchanged across copper, met coal, energy coal, and potash.
Overall, it was a relatively sound half-year result, with most key numbers running in-line with market expectations.
Debt to rise
BHP's net debt stood at US$11.79 billion for the half, down 2% year-on-year but up 29% from the previous half. The company expects net debt to rise toward the upper end of its US$5 billion to US$15 billion range, which would mark its highest level since FY21.
A key driver of this increase is the Vicuña transaction, completed in January 2025. Under the deal, BHP and Lundin Mining jointly acquired Filo Corp for approximately C$4.1 billion, forming a 50:50 joint venture called Vicuña Corp.
Dividend outlook
Macquarie notes that BHP’s net debt position and guidance "make it hard for BHP to pay above the 50% minimum payout." The analysts also expect the company’s debt to increase further in FY27-28.
UBS analysts also expect a relatively muted dividend outlook. The table below highlights key metrics from UBS' modeling.
FY24 | FY25e | FY26e | FY27e | FY28e | |
|---|---|---|---|---|---|
Net earnings (US$m) | 13,539 | 9,874 | 11,833 | 11,059 | 10,451 |
Net debt (US$m) | 8,217 | 12,712 | 13,683 | 12,935 | 13,807 |
EPS (US cents) | 267.1 | 194.8 | 233.4 | 218.2 | 206.2 |
DPS (US cents) | 142 | 97.42 | 116.75 | 109.10 | 103.10 |
Dividend yield (%) | 4.8% | 3.8% | 4.5% | 4.2% | 4.0% |
Payout ratio (%) | 53% | 50% | 50% | 50% | 50% |
Source: UBS | January 2025
Forecasts for the outer years may be volatile, but they reinforce the view that BHP will likely struggle to maintain a payout ratio above 50% due to rising debt levels.
For context, BHP's payout ratio was 84% in FY22 and 66% in FY23, with yields of 12.7% and 5.5%, respectively. The forecasts suggest that even if iron ore prices rise, dividend upside may be limited, given the lower-than-historical yield and the company's focus on debt commitments.
The bottom line
BHP boasts the world's largest copper endowment, with multiple organic growth opportunities alongside its Vicuña joint venture. The company is advancing a massive copper pipeline while also gearing up to bring one of the world's largest potash projects online by 2026.
However, building a growth pipeline that aligns with megatrends like the energy transition, data centres, and urbanisation requires both time and significant investment. While BHP’s dividend profile may eventually return to historical levels, income-focused investors will likely face lower payouts in the near term.
