BHP share price surges on oil and gas deal: would I buy?

The BHP share price has surged higher after the FTSE 100 miner declared its largest ever dividend. With an 8% yield on offer, will this Fool buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The share price of FTSE 100 mining giant BHP Group (LSE: BHP) has hit new highs on news that the company will pay its biggest ever dividend and sell its oil and gas business.

Despite the stock’s gains, BHP shares still offer a dividend yield of nearly 9%. As an income-hunting investor, should I consider buying the shares for my portfolio today?

Ditching fossil fuels

BHP’s board has seen the writing on the wall and decided to dispose of its oil and gas business. This will reduce the company’s carbon emissions and avoid the risk that the firm’s petroleum reserves could become worthless stranded assets in the future.

The disposal will be structured as a merger with Aussie firm Woodside Petroleum. What this means is that BHP’s oil and gas portfolio will be combined with those of Woodside, which will take ownership of the BHP assets.

It’s a logical plan, in my view, as Woodside is already a partner in some of BHP’s Australian gas projects. BHP’s petroleum business has generated less than 10% of its profits in each of the last two years, so this deal won’t make a big difference to future earnings.

However, BHP shareholders hoping for a cash windfall may be disappointed. Instead of cash, they will receive Woodside shares. They’ll then have to choose whether to hold on to Woodside — which currently offers a 6% yield — or sell the stock.

Record dividend

The Woodside deal was revealed alongside BHP’s latest annual results, which cover the year to 30 June. These contain some fairly impressive numbers.

BHP’s revenue rose by 42% to $60,817m last year, while pre-tax profit climbed 82% to $24,601m. Shareholders will receive a record dividend of $3.01 per share for the full year, including a final dividend of $2 per share.

These results price BHP shares on 10 times underlying earnings, with a dividend yield of 8.9%.

If this level of profit is sustainable, then I want to buy the shares. But mining is heavily cyclical, and I’m concerned that we might be near the peak of another mining boom.

BHP share price: what I’ll do

BHP’s surging profits have been driven by strong demand for iron ore from China. Last year, 80% of the group’s operating profit came from iron ore. Most of the remainder came from copper.

I’m bullish on copper, due to growing demand from renewable energy and electric vehicles. But I’m not sure if current market conditions for iron ore are sustainable. I’m also aware that BHP is starting to increase its spending on new projects. Capital expenditure is expected to rise from $7.1bn to $9bn over the coming year.

One final warning for me is that BHP shares are now priced at more than three times their book value. For me, this is a sign that the market might be nearing a top. I think BHP probably has another year of strong earnings ahead.  After that, broker forecasts suggest profits may fall. For me, it feels a bit too late to start buying, so I won’t be adding BHP shares to my portfolio today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »