BHP Billiton can continue investing in new projects as well as return money to shareholders, analysts believe.
The diversified miner posted an underlying half-year profit of $US7.8 billion on Tuesday and said it was on track to reduce its net debt to $25 billion by June.
Analysts said BHP cutting gearing levels to below 30 per cent would trigger a shareholder buyback or investments in further growth.
”We think they can do both,” Deutsche Bank analyst Paul Young said.
”Management believe they can achieve an average internal rate of return of over 20 per cent for the major project options. We see further project approvals with the 2014 full year results”.
Mr Young suggested the Spence copper project in Chile or the Pilbara iron ore business were the most likely candidates for investment funding.
BHP will spend $US16 billion on projects this financial year. UBS analyst Glyn Lawcock said that figure, combined with a debt reduction, would give the company the capacity to complete a shareholder buyback and invest in growth.
”We believe that BHP’s target of maintaining capex at up to US$15 billion per annum keeps the balance sheet flexible enough to balance shareholder value between investments in growth projects and capital management,” Mr Lawcock said.
”We do not believe that BHP is sacrificing future growth for cash returns. It is more a case of not over spending such that projects suffer from lack of ability to manage from a resourcing perspective.”
Mr Lawcock added the Jansen potash project in Canada to the list of projects for possible investment funding.
He estimated that BHP could announce a shareholder buyback of $US5.3 billion at its full-year result.
”To be conservative, the buyback could be over two years enabling further debt reduction also.”
But Macquarie analysts said while BHP could launch buybacks of up to $US7 billion, it was more likely to favour growth investment, citing a rising share price and fierce internal competition for capital.
BHP’s share rose for the ninth consecutive day on Tuesday, its longest rally since mid 2009, to a high of $38.89. Shares were slightly lower at $38.88 in midday trade on Wednesday.
Macquarie said BHP was targeting annual capital expenditure of $US15-16 billion in 2015, double rival Rio Tinto’s 2015 spend of $8 billion.
”And yet BHP’s production is only 40 per cent higher in copper equivalent terms suggesting, this is about more than merely replacing current production, with the focus of future investments being iron ore, copper and petroleum alongside jansen,” Macquarie said in a note to investors.
But Citi analyst Heath Jansen said BHP had scope for a modest buyback. He said he did not expect returns to shareholders to accelerate dramatically until net debt has been been cut to $US20 billion, ”which will not occur until 2015 on our estimates”.
”In addition to capital management initiatives, we expect BHP’s dividend to increase 7 per cent in FY14,” Mr Jansen said.
”The payout ration including buybacks has averaged 50 per cent in the last 10 years, and our forecasts imply a dividend payout ratio of 43 per cent in FY14 and 47 per cent in FY15.
”We expect the total payout ratio after buybacks to be over 50 per cent in FY15.”