Will BHP’s asset sales see higher dividends?

In the lead-up to BHP’s (ASX: BHP) internal review of the company’s capital allocation framework, which is expected to be released to the market next February, there’s growing talk of a higher than originally expected payout ratio.

When it comes to capital allocation, much of the market’s previous focus has fixated on BHP’s future debt tolerance, which is currently set between $US12bn and $US17bn.

Macquarie analysts told the Australian Financial Review that the ‘big miner’ may be in a position to ‘sweeten its dividend payout ratio’ after its petroleum and coal assets are demerged next year, which will result in reduced capital expenditure.

Post-merger, BHP will be a smaller company – with reduced revenue once the petroleum and coal assets are sold off.

Less capital hungry

As a result, the company will be unshackled from the capital-hungry schedule facing the petroleum division, previously earmarked for big projects like the Scarborough LNG project and beyond over the next 10 years.

As a case in point, the petroleum division would have accounted for 40% of BHP’s capital spending in the next five years alone.

While BHP’s dividend policy states that a minimum 50% of underlying attributable earnings will be returned to shareholders annually, the BHP board reserves the right to make further returns to shareholders as circumstances dictate.

Payout ratio averages 70%

Interestingly, while CFO David Lamont reminded investors in August that the company’s minimum payout ratio of 50% would remain unchanged, BHP’s actual payout ratio has - since the new dividend policy was introduced five years ago - averaged closer to 70%.

BHP’s dividend payout ratio exceeded 90% for the six months to June when iron ore prices soared to record highs.

In a recent note to clients Macquarie analysts noted, “we anticipate the reduction in capex to more than offset the removal of the operating cashflow contribution from the petroleum business.”

As a result, the broker expects BHP’s balance sheet to further strengthen even with a payout ratio greater than 80%.

Meantime, brokers FY22 dividend estimates range from 296 cents to 532 cents.