As I promised on Twitter here my latest analysis. As you readers already know, in the market nowadays it is hard to find a good stock for a bargain price. And that’s what I love! So when a fellow blogger posted a tweet about a new purchase he did, I was curious.
Lets take a look at a company that is engaged in mineral and oil exploration, development, and production. And a company in a sector which is not present in my Vrijheid Fonds at this moment. So it is good for diversification.
This analysis is on BHP Billiton – PLC (BBL).
Company (from google finance): BHP Billiton plc is diversified natural resources company. The Company generally operates through customer sector groups (CSGs). The Company operates in nine segments: Petroleum, Aluminium, Base Metals, Diamonds and Specialty Products, Stainless Steel Materials, Iron Ore, Manganese, Metallurgical Coal and Energy Coal. As of June 30, 2012, the Company was working in more than 100 locations worldwide.
Can I explain this to a 10-year old? What Does This Company Do?
BBL is a company that mines many products. Such as Aluminium, diamonds for mommies ring and iron ore to make iron products. And of course they mine coal for our energy plants.
Dividend Aristocrat: BBL is not a Dividend Aristocrat. It is a Dividend Contender. BBL is paying dividend for 12 consecutive years.
BBL is a 5 star stock on Morningstar.com! Great. But BBL is no Dividend Aristocrat yet. Therefore it is a fail.
Dividend Yield > 2.5%: The dividend Yield of BBL is 5.1%. This is way above the industry average of 3.9%. The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 48%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Wow, Let the money roll in! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 3.6, 10.1, 10.6 and 30.7. With a 3 years average over 10% that makes me excited. PE also passed the fourth Pollie-code.
P/E-ratio < 15: BBL has a current P/E ratio is 9.1. And is lower then their 5 years average (14.0). If we look at the current ratio we can say that is below the requirement of the Pollie-Code. Therefore this is a pass on the Pollie-code.
EPS > 0: The EPS is 5.18. So BBL also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 34.2%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 147.67 Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 15.4. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk high and low are: 47.20 and 71.44. This means that BBL will be in my buying zone when the stock price is below 65.38 ((71.44-47.20)*0,75 + 47.20). At this moment BBL is trading for $47.25. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for BBL is 1.69. So I have to take in account that this stock can be volatile.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to GE with D = $2.77, G = 5% and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $56. At this moment BBL is trading way below its intrinsic value.
Conclusion: When I look at the analysis, BBL passed 9 out of 10 from the Pollie-code. The Pollie-code failed at the Dividend Aristocrat. If we take a look at Gordon Growth Model we can see that the stock is trading in the undervalued zone. And BBL is trading in the zone of their 52 week low.
Furthermore one of the competitors of BBL, Glencore made a bid on Rio Tinto. This may trigger more takeovers/mergers. If we take a look at some of my fellow bloggers, BBL is very hot the last week.
BBL is a great stock with potential! But at this moment with low oil prices and low iron ore prices a stock under pressure. Considering all the data BBL is, in my opinion, a stock that is buyable. I certainly put BBL on my watch list for my Vrijheid Fonds
What are you – the readers, thoughts on Billiton? Is it a buy, do you own it?
Please comment on my analysis and thanks for stopping by!
Disclaimer: I’m NOT a registered investment adviser, investment professional, brokerage firm or investment company. Readers are advised that information on the website is issued solely for information purposes and not to be construed as an offer or recommendation to buy, hold, or sell any securities. All information, opinions, and analyses included are based on sources believed to be reliable, but no representation or warranty is made concerning accuracy, correctness, timeliness, or appropriateness. Please consult with an investment professional before investing any of your money.