Debt reduction, share buy-backs, dividends
$25 billion of the windfall of cash was used for debt reduction and $44 billion was returned to shareholders in the form of share buy-backs ($22 bn) and dividends ($22 billion) — a total of $69 billion. Thank goodness for that.
BHP spent ‘only’ $11 billion of its cash flows on acquisitions in this period. $6 billion on Western Mining in 2005 and $5 billion on the Fayetteville gas assets. Another $15 billion was spent on the Petrohawk gas assets only days after the end of this period. Unfortunaely, the first half earnings announcement included a write down of the US gas assets by $7.2 billion. But criticism of the purchase of those assets relies mainly on the advantage of hindsight.
Nonetheless, it is by good luck rather than good management that more was not wasted on expensive acquisitions – especially in BHP’s failed bid for Rio Tinto in which the then CEO Marius Kloppers offered to pay at least $20 billion over the odds for Rio. This assessment does not rely on hindsight. It is based on the increase in the BHP share price and decline in the Rio Tinto’s share price at time that BHP bid was withdrawn.
BHP spent the largest part of its extra cash flow on expanding production. There is always a danger that firms that receive cash windfalls will waste the cash on low return investment projects. For the most part BHP has not done that in this cycle. Although, the plans for the $20 billion expansion of the harbour in Port Hedland were a very worrying sign.
After considering how BHP’s windfall of cash flow was used in the boom period of 2004-2011, is it right to criticise the BHP board for paying out a large amount of cash as dividends, even if that made dividends unsustainable?
The board might have made greater use of buy-backs, especially to buy back more shares on the London Stock Exchange where BHP shares traded at a large discount to the same shares on the ASX. It might also have declared ‘special dividends’ but that would have signalled that they did not believe the cash flows were permanent.