Bhp Billiton Discussion Topic Review

Response to discussion thread “Ruth Assignment 1”

Dear Classmates,

I definitely agree with the view that management will always try to present a favourable report of the company’s financial performance.  This discussion thread raises two items that will have a negative impact on shareholder’s equity and the share price:

1. The value of its asset impairments
2. The company’s dividend policy

In order to paint the company in a positive light, management must try to minimise the value of asset impairments.  On the other hand, although the company’s dividend policy can have a negative impact on shareholder’s equity, a deviation from this policy will signal to the market that the company is in trouble, which could potentially have a worse impact on the share price.

The value of asset impairments

It is understandable that BHP Billiton’s management may be reluctant to show the full extent of its asset impairments because these impairments will reduce the company’s book value, which in turn will reduce the company’s market value.  The value of the company’s asset impairments will be shown as valuation losses in the company’s Statement of Comprehensive Income for the year ending 30 June 2016.  These valuation losses will make a negative contribution to shareholder’s equity on the company’s balance sheet at the end of the reporting period.  

Simon raises an interesting point about how KPMG has independently verified the valuation losses, and why their opinion may be biased.  Simon’s argument is supported by the views of commenters such as Citi analyst Clarke Wilkins and JPMorgan analyst Lyndon Fagan, who have also questioned the size BHP’s reported asset impairment.

The company’s dividend policy

As Ruth has mentioned, and according to the “Shareholder Information” section of BHP Billiton’s website, the company has a progressive dividend policy which aims to “steadily increase or at least maintain the dividend per share in US dollar terms at each financial half year”.  

The company’s dividend policy will have a negative impact on the company’s book value because dividends make a negative contribution to shareholder’s equity.  As Ruth has mentioned, the company’s debt-to-equity ratio at the end of FY2016 is expected to be significantly higher than at the end of FY2015.  The company’s dividend policy will exacerbate this problem.  The company’s Consolidated Income Statement for the year ending 30 June 2015 shows that, although the company’s revenue dropped from around US$55 billion to US$43.5 billion from FY2014 to FY2015, dividends paid for each ordinary share increased from 118 cents to 124 cents.

Response to discussion thread “Assignment 1 – Initial Submission – Myuran Pathmanathan”

Hi Myuran,

You have raised some very interesting points for discussion.  

In your response to Q2, you mentioned that the asset turnover ratio (revenue/assets) for the current and future years will increase.  I agree that this is the most likely scenario, but it is worth pointing out that the company’s revenue is likely to fall over the next reporting period.  Based on the company’s 2015 Annual Report, revenues have dropped from around US$55 billion to US$43.5 billion from FY2014 to FY2015.  Given the current economic situation with falling oil prices and the prospect of additional competition from Iranian oil producers, it is likely that the company’s revenue in FY2016 will be below that of FY2015.  I do acknowledge, however, that it is very unlikely that revenues will drop so much that the turnover ratio would reduce – company’s annual revenue would need to drop by US$20.6 billion (i.e. by around half of its FY2015 value).

I also agree that the third point you made in your response to Q2 (relating to net income) is the most likely situation after the current reporting period.  It is unlikely that future impairments will occur at the same rate after FY2016, but it is important to keep in mind that there will be at least US$7.2 billion of impairments recognised in FY2016, which means that net income for 2016 is expected to be less than net income for FY2015.  The same comment applies for the fourth point you have made in your response to Q2; these improvements are likely to occur after FY2016.