BHP Group Ltd (ASX: BHP) shares have been a good stock to own for the past 2 years. Back in February 2108, you could have picked up BHP shares for under $30 a piece. Since that time, BHP has appreciated significantly. Today you can pick some up for $39.31 (at the time of writing), but back in July last year, the share price was knocking on the $43 level.
BHP has showered dividend payments on its shareholders over the last 2 years as well. If you had picked up BHP in February 2018, you are probably looking at grossed-up dividend returns approaching 25% in the time since.
All that sounds pretty good. But here’s why I’m not a fan of BHP – or any ASX resources stock really.
BHP (like all miners and resource companies) is what’s known as a ‘price taker’.
Most companies can charge what they like for their products – it’s what makes Apple one of the biggest companies in the world right now.
But any company that sells a commodity must accept the market price for its products. There’s no special ‘brand premium’ for the coal, iron or copper BHP sells – because everyone knows these are the same products that Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) or Whitehaven Coal Ltd (ASX: WHC) are selling.
If the iron ore price is at $100 per tonne, then BHP is selling it for US$100. If it’s US$40 – same story. The company is at the complete mercy of the markets.
The only thing BHP can do to boost its profits is try and reduce the costs that it incurs in extracting the resources that it sells. Now BHP is very good at this – it happens to be one of the most efficient miners on the planet – which partly explains its massive market capitalisation.
But I vastly prefer companies that can control their own destiny.
Just take Altium Limited (ASX: ALU). It makes software that helps engineers design printed circuit boards. Depending on the quality of its software (which is very high), it can charge what it likes as long as its customers are willing to pay.
The company is in complete control of its own future and this is what has helped Altium shares more than double over the past 2 years. I fully expect that Altium has what it takes to double again in the next few years – not something I can say for any established resources stock.
The post Here’s the problem with BHP shares appeared first on Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium. 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