Why BHP's dividend outlook was downgraded by analysts
Citi analysts expect a lower payout ratio between FY25-26 amid higher capex, China uncertainty and the desire for more M&A.
Source: iStock
Mentioned
KEY POINTS
- BHP achieved production guidance for all commodities in FY24, including record iron ore output and highest copper production in 15 years
- Brokers downgraded BHP's dividend outlook due to weaker FY25 production guidance, Nickel West issues, and uncertainties surrounding iron ore prices and China's economy
- Citi cut BHP's dividend payout ratio forecast to 52%, expecting lower dividends in FY24-25
BHP (ASX: BHP) finished FY24 on a strong note, achieving production guidance for all of its commodities, including record iron ore output and the highest copper production in over 15 years. But the stock still finished the session down 0.9%.
Brokers including Citi and Macquarie downgraded BHP's dividend outlook overnight, citing a weaker-than-expected FY25 production guidance, the impairment and costs associated with Nickel West as well as uncertainties surrounding iron ore prices and China's economic outlook.
"Consensus looks too high"
BHP's dividend policy aims to pay out at least 50% of its earnings each half, with an average payout ratio of 75% over the past six years, according to UBS.
Prior to the recent quarterly announcement, UBS predicted a below-consensus final dividend of 69 US cents per share, based on a 53% payout ratio.
"We expect BHP to be conservative with the dividend payout as it is set to lift capex materially in FY25-26, the outlook for China/iron ore is uncertain, net debt is still in the upper half of its target range, and as it seeks more copper exposure through M&A," the analysts said in a note last month.
New forecasts
Citi revised its outlook for BHP's dividend payout ratio to 52% on Thursday, and cut its FY24-25 dividend forecasts by 9% and 16% respectively. The key drivers behind this include:
Modestly higher assumed opex and material capex uplift in FY25 (US$9.8bn) and FY26 (US$10.7bn) compared to US$9.3 billion in FY24
Costs associated with Nickel West (EBITDA loss of US$300 million in FY24 as well as previously announced non-cash impairment charge of US$3.5 billion)
Additional redundancy and closure costs associated with Nickel West could amount to an additional US$0.9 billion
Downgrades to FY25-26 iron ore and copper earnings assumptions (modest 1-2% lower than previous forecasts)
Downgrades to FY25-26 coal earnings assumptions (down 11-17% compared to previous forecasts).
The broker now expects BHP to deliver the following dividends:
Old | New | % Chg | |
|---|---|---|---|
FY24 (US cps) | 153 | 139 | -9% |
FY25 (US cps) | 183 | 154 | -16% |
FY26 (US cps) | 175 | 154 | -12% |
Ratings changes
Citi maintained a Buy rating on BHP, citing a positive outlook for copper prices, despite lowering its target price from $48.50 to $47.50.
Macquarie, meanwhile, kept its Neutral rating and $43.00 target price unchanged. "BHP's copper performance was pleasing after the recent Anglo American bid ... We still prefer BHP in Australia due to superior asset quality and better relative valuation," the analysts said.
