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Is the BHP share price a buy as US–China trade tensions ease?

Phil Harpur
Man asking financial questions

The easing trade-tensions between the US and China are likely to assist Australian resources companies that deal with China. So, does this make the resources giant BHP Group Ltd (ASX: BHP) a buy?

BHP is definitely my pick of the ASX resource sector shares. It is a diversified natural resources company and is one of the world’s top producers of commodities like iron ore, coal and copper. BHP also has substantial interests in oil and gas.

As it is the third largest share listed on the ASX, not only can it leverage economies of scale, it is frequently bought and held by super funds and managed funds providers, and also by default is listed in many of the popular Australian exchange traded funds (ETFs) such as Vanguard Australian Shares Index ETF (ASX: VAS).

Growing dividend yield on the back of solid financials

BHP’s strategy is to continue to consolidate its current assets, which involves divesting underperforming assets and reducing debt while also increasing operational efficiency.

Its extensive portfolio includes some of the largest mining assets in the world, which continue to generate large and ongoing free cash flows.

FY19 was a very successful year for BHP, with strong growth across its various segments. The mining giant produced a profit from operations of US$16.1 billion and an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of US$23.2 billion at a margin of 53% for continuing operations. Also, there was a record US$17 billion returned to shareholders for the year. Dividend payouts were very attractive during FY2018–19, with BHP offering a fully-franked dividend payment of $4.76 per share.

BHP increased its dividends in 2019, boosted by strong iron ore prices. The company currently has a mandate to maintain a dividend payout ratio of at least 50%, which is very favourable for shareholders.

Historically, BHP’s dividend payout was well below that of the traditional high dividend paying shares such as the banks, because most of BHP’s profits were re-invested for growth. However, the mining giant has increased its dividend almost every year since 2010 and its dividend yield now sits at a very attractive 4.8%, fully franked.  

Easing trade tension should boost growth

The easing tensions in the trade war between US and China should assist BHP’s growth in FY20 and FY21, given that China accounts for around half of the world’s consumption of metals. In particular, it could lead to further strong demand for steel from China. Copper is another of BHP’s assets that has been performing strongly and is predicted to continue to do so.

Foolish takeaway

If you’re looking for a first-class ASX income share, I think that BHP is well worth considering. With easing tensions in the US–China trade war and improving commodity prices, BHP looks set to continue to generate high levels of free cash flows during FY20 and into FY21, which should help to further boost its already attractive dividend yield in years to come.

It also has an attractive price-to-earnings ratio of 14.4, which is well below the market average of around 18.

However, it is important to note that commodities are extremely volatile and sensitive to various factors, so an investment in BHP should be made with a long-term outlook in mind.

The post Is the BHP share price a buy as US–China trade tensions ease? appeared first on Motley Fool Australia.

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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020