January Stock Purchase #2

This week I decided to add to the stocks I hold in the Basic Materials sector – partly because my Rockwood Holding (ROC) shares have now become Albermarle (ALB) shares with a lower dividend and partly because the sector has dropped in price of late. The last time I added to this sector was back in November when I added BMS.

I currently own shares in DOW, APD, BMS and ROC ALB in the Basic Materials sector. I decided to finally add an ADR to this sector while I’m waiting for Albermarle’s acquisition to complete. Adding international stocks can help lower overall risk and after further research I learned that the UK’s taxation agreement with the US means there’s no tax-withholding when buying a UK origin ADR stock.

So with that said, I set my Sharebuilder purchase to BBL this week.

BHP Billiton

BHP Billiton (BBL) is a diversified mining company that formed from a merger between BHP (Australian) and Billiton (UK / Dutch). Ironically I’ve mentioned BHP Billiton previously in November when I removed them from the UK Dividend Champions List.

The company stock symbol is a little confusing because the company is a Dual-Listed Company with two parent companies – BHP Billiton plc (BLT:LSE) in the UK and BHP Billiton Ltd (BHP:XASX) in Australia. In addition each parent company has its own ADR listed in US exchanges – BBL and BHP. BBL represents the UK-listed BHP Billiton plc company and BHP represents the Australian-listed BHP Billiton Ltd. The key difference between the two symbols is the US tax-treatment – there’s no foreign tax withheld on the BBL symbol but there is on the BHP symbol.

Dividends

BHP Billiton pay their dividends in US$ and were removed from my UK List due to currency exchange rates affecting the UK sterling dividend amounts. In the US, they’ve increased dividends for 12 years and Management have a progressive dividend policy.

The current bi-annual dividend payment of $1.24 gives a dividend yield of just under 6%; my high limit for dividend yield. The high yield is mostly a function of lower stock price as the dividend ratio is a reasonable 45%. Dividend growth has been 21% over the last 10 years but the growth is slowing with a 4% increase last year.

Valuation

BBL’s share price has been dropping steadily since a high of $71 in July last year, and its current value of $40.87 represents a 57% drop. Its P/E is 8 and has declined steadily since a high of 19 in 2012. The stock is certainly cheap and short term growth estimates are negative. Long term growth is currently estimated at 5.6% over five years.

Diversity

BHP is diversified both geographically with most of its revenue coming from resources in fairly stable regions (Europe, Australia, North America). It’s also diversified in its range of mining activities and currently operates in five business units: Petroleum and Potash; Copper; Iron ore; Coal; and Aluminum, Manganese and Nickel.

Risks

The stock sector as a whole lost 5% over the last 12 months; only the Energy sector has done worse in that period (-6%) and there’s no sign of the energy price war ending soon. The low price of oil affects BHP which is the largest overseas investor in US onshore shale.

The price of iron ore has dropped significantly in 2014; partly due to over-supply and partly due to lower growth in China and supply outweighs demand. This has also affected the price of mining stocks in a similar way to oil and energy stocks. Copper has held on to its price, but is likely to drop further this year.

South32

Last year the company announced plans to spin-off some of its Aluminum, Coal, Manganese, Nickel and Silver assets into a separate company to be named South32. This leaves the original BHP managing a simplified portfolio of Coal, Iron ore, Petroleum, Copper and Potash. Subject to shareholder and regulatory approval, the de-merger is planned for the middle of this year.

The intent behind the spin-off is to allow both companies to focus on their respective areas and improve efficiency. The existing Aluminum, Manganese and Nickel business unit contributed 12% of total revenue in FY2014, with the core business units contributing over 97% of underlying EBITA.

January Stock Purchase

I bought 7.2525 shares in BBL for $300. This purchase brings the contribution of Basic Material stocks to about 9% of my projected income from dividend stocks, with BBL representing just under 1%.

 

Quote of the day

An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognize that they are the same.

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