Here I am again… hurting, almost feels like the knife that went in the first time was starting to come out, only to be pushed, but this time twisted. Another dividend cut, the 2nd one in three little months. Another commodity dependent business – BHP Billiton (BBL) cut their dividend, by an almost “coincidentally” 74% – the approximate figure that KMI also cut theirs by. This didn’t just sting, this burns, but it is a very & true learning experience for me. Read on…
Background
Here I was in December looking to hit my 2015 goal that I established towards the end of 2014. The oil and gas markets kept plummeting and Kinder Morgan (KMI) decided it was best for the company to cut their dividend down from the recently increased dividend of $0.51 per share per quarter to $0.125 per share per quarter. I owned approximately 140 shares then, and wow… the $214+ that my forward dividend income declined by hurt and that hurt bad. But it did give me valuable lessons and reminded me again what it truly means to be a dividend income investor. Even after this significant dividend and investing event, my gut and eyes would always burn with an “uneasy” feeling when seeing the ticker BBL on my portfolio listing. I always kept thinking – since the ADR is semi-annual, maybe the dividend won’t be impacted by the swings in prices occurring in the market. At the time they were $75B in market capitalization – how could they not withstand this? This iron ore, mineral building and extraction company had a great wall to defend itself as their blood is composed of this right? Think again.
News from BBL
BHP Billiton (BBL)… oh BBL… I read your earnings release. $7.8 billion impact from weak commodity prices. Think that alone would easily lead to a dividend cut, bar none. They have reduced spending and well, i will say – this story and plan is VERY familiar. Enter the KMI ticker into this news release and I think you end up reading the same thing. They want to free up their cash flow. They want to protect their business. They have now acknowledged the commodity price deterioration isn’t a short term blip, but a longer term sickness that needs long healing. They want to push forward but do it in the “right” manner. They want to keep shareholders satisfied and know that to protect their best interests – they have to become a more sound business. Very similar to KMI.
BBL’s new policy now is a minimum 50% payout standard and the board will have to approve anything higher than that. This is paid easily via free cash flow. What is also nice to see is they sit on $11B of cash and have similar current payable amounts combined with current portions of long-term debt. I understand what they are doing, but I just am unsure of what or for how long the commodity price tranches will be and if they can continue to suffer net losses continuously. However, cutting their dividend was the right thing to do, so much cash is saved for the business.
A new, HIGHLY valuable lesson is imprinted over this given the last few statements above. Payout ratio. Most of these companies were riding so high, well above the 80% pressure hold of a payout ratio and some closer to 100%. This is a warning sign (unless you are a REIT, different discussion). This is why when we go through our dividend diplomat stock screener to always look at the payout ratio and try to find an investment at the happy medium – as they can withstand this undoubtedly. A good example of the stock screener in use is our recent T. Rowe Price (TROW) stock analysis, and yep – there they are, right under a 50% payout. Another lesson here is – the impact of commodity pricing on big businesses, not just the small ones, is very, very apparent. The big guys aren’t safe anymore and I would consider BBL a big player, as well as KMI.
As we progress through 2016, and to align with my goals and the lessons learned above and through KMI – my purchases are going to be, well, more boring to say the least. I know my mountain just grew a few more feet ahead of me, as I owned 63+ shares of BBL aka $156 to $40… $116 of forward income has been reduced, which is easily a $3,000+ investment… hence my new focus on making larger investments as opposed to smaller ones. My purchase of ADM back in January is now essentially a wash. Poof, gone. Dammit.
Conclusion
So with KMI and BBL combined, $330 has been reduced from my forward income. I’m upset at myself for not taking a deep breath and understanding more of what really makes sense out there. I couldn’t predict this to occur. I am not a commodity trader, nor do I read the details on what’s occurring in that market. That’s okay though. I need to stick with what I know, such as the 5 foundation stocks for a dividend portfolio or other stocks that we discuss amongst our top 5 lists that we share with the community. Definitely a set back, but what is life if you never have to get up from a fall, right? I’m pumped as ever and know this is a hurdle that I’m going to fly over. I’ll be over $7,000 in projected income before the end of April. Mark it down. This then would give me 8 months to add $1,000 more to the forward income goal. It will all be OK.
Enough about me – what about you? Did you feel the impact? Do you own BBL? What do you make of it and/or do you feel they will be an okay business going forward? Please let us know and thank you, God bless and keep at your dreams and goals!
-Lanny
Sorry to hear about that. Although I don’t own BBL myself, I am big on commodities, particularly right now… Commodities are a tricky business, and they routinely boom and bust, over and over again throughout history. One thing I’ve learned is this — If the sector is not in liquidation, I’m not interested in buying.
It may seem counter-intuitive, but really, the best way to play this space is to get in at or near liquidation. For a sector to be at the depths of despair, most of the seniors will have to cut/eliminate their dividend. For me, this is a sign to move in aggressively, not shy away!
Further, in a deflation, the seniors are the ones who will feel the pinch the most (they are straddled with the most debt, think FCX, BBL, RIO, etc.). What I’ve learned is that if you want to make serious money here, it’s better to focus on the nimble juniors who have the best projects and lowest operating costs. Most juniors won’t have too much debt, no dividend, and will be able to withstand prolonged periods of depression for much longer.
On the upswing, the very best juniors should outperform on the way up as well.
I realize that most income investors won’t find any appeal with this approach, but really, that’s how you make big money playing commodities… It’s an absolutely dreadful sector to play in during good times b/c things like payout ratios, P/E, free cash, etc. will all look AMAZING. Once the bear hits, all that goes out the window and don’t mean anything… P/B < 1, negative EV… that stuff happens in a brutal bear! Who could have predicted sub $30 oil?!? Sub $2.00 copper!?!
It happens… If you love firesales where you can buy pennies on the dollar, you couldn't ask for a better opportunity.
FI Fighter,
Interesting… obviously I’m a dividend investor and I think that’s where it differs right? You’re in it for the appreciation and the bang for the buck, but I’m in it for a paying and increasing dividend. But at the end of your statement – it does happen, we can’t predict the low commodity pricing and the wild swings in market price on equity securities based on small dollar fluctuations in the commodities. Time for me to stick with “common sense” I think and valuation. So mad at myself, but I’ll move on from this, and as I’ll say it again = it does happen. Thanks again FiF for coming by.
-Lanny
Cutting the dividend was the right decision for BBL as a company, but it is definitely bad for your portfolio. I think the lesson of the past year is that we shouldn’t count on any commodity-based stocks for portfolios we hope to retire on.
I did buy 100 shares of VALE a few months ago at around $4, but that’s more of a lottery ticket. Iron ore is a weird commodity – it’s controlled by a few companies that meet monthly to set the price, and still none of them make money off it.
Brian,
Thank you very much for coming by. I agree with you, it was the right decision, hands down. This frees up so much cash flow, it’s not even funny. And I agree – I am finding it hard to believe that these are good go tos for a stable portfolio that provides an income stream.
Haha – hope the play with VALE works out for you… iron ore… controlled by a few companies, set price, no money to be made, eh? How long are you going to hold the VALE/long term goal with this?
Thanks again hope to hear back soon!
-Lanny
Don’t have KMI or BBL but I know the pain of a dividend cut. I believe I mentioned it in my last comment when you wrote the KMI post. Even the bluest of blue chips can cut a dividend. I mentioned I experienced and held my GE and WFC shares after they cut about 7 years ago. Think about it… GE and WFC. Super solid names, diversified, etc. etc. yet had to cut. I hold after a divvy cut if I still believe in the company and industry. If you think commodity prices will swing back up then holding might be wise.
DivHut,
GE and WFC luckily have come back decently with their cut, right? One of the biggest banks and a huge conglomerate right there.
But yes – BBL & KMI are similar entities in that they are major players + are doing what’s best for their business.
How’s everything going DivHut? Thanks again for commenting!
-Lanny
When I buy a stock like BBL, or even KMI, I don´t have the same strategy as I do with, say, KO or JNJ. You could say that I take a step away from my main strategy dividend growth investing. And if you don´t look at the stock as a dividend growth investing, it kind of makes sense to start gradually investing in this sector right now. My strategy allows me to dabble a little bit outside of the dividend growth mainframe. For those whose investment process does not allow this, I honestly don´t understand how they could invest in commodities at all. Dividends doesn´t exist in a vacuum outside of the business. I´m sensing a lot of hope with dividend growth investors who´ve invested in the commodities sector. Hope has nothing to do with any investing strategy.
I´d like to add two points to my post above. First, not my best attempt at english, sorry. Second, when I do “dabble”, I don´t “book” those dividends to my projected future income, because that is hopeful. The second point is important.
Tom,
Understandable. Hope = not a strategy. Definitely can send you on that. And that’s very smart to not include in the projected income, I actually may consider that going forward – will definitely keep you posted. Very interesting.
Appreciate all of the points Tom! Question I have – how do you feel about BBL right now? haha
-Lanny
I´m divided actually. Since there is a lot of unbalances that stems from states subsidizing mines globally the market can´t really correct itself. It is basically geopolitics and corruption. That is my main gripe, otherwise I would probably be buying continually throughout 2016. I might add some to BBL (and definitely to KMI), but won´t bet the farm. 🙂 I´m glad you took my comment positively, I wasn´t very eloquent and might have come off as harsh.
Hi, long time reader, first time commenter.
I have about 39 shares of BBL, which I’ve chased down from $50.80 (ouch!) with a cost basis of about $35 now.
Maybe you could say I’ve dollar cost averaged into the position, but it was a case of whenever I had some free cash outside of core positions.
I’m going to buy more soon while the stock is still unsettled, I was hoping for more of a fall yesterday after the dividend cut announcement, but maybe today will be my day.
My reasoning is two fold:
1. I want to bring my cost basis somewhere close to where the stock sits right now as this is a long term hold for me
2. I’m of the opinion that this’ll be one of those opportunities to pick up a stock at an unjustified low point, let the management team do its thing and come out smiling in 20 years time.
Jack,
Thank you so much for being a reader and love that this is your first comment!
Nice cost average, lower than mine I believe haha, that’s for sure. So you are going to get more eh?
Do you believe then in the long-term strategy of the company? Feel like they will have a strong business model going forward?
Love your comment and thanks again for coming by! We truly appreciate it.
-Lanny
Bought Thursday at $19.45 bringing my cost average to $27.08.
That’s it for me now, I’m done purchasing for the very foreseeable future. It’s not quite a Charlie Munger “find a few great companies and then sit on your ass” type position but I’m happy to let it pay me enough to get a whole share per dividend, which will be a first for me, even if it stays at the new dividend level ($0.32). It’ll stay for a long time in my account, DRIP’ing away. I’m happy the company has enough of a moat on its pre boom assets to see it through and that the dividend cut should give it the strength to hoover up distressed asset at fire sale prices from smaller operators.
I guess it’s nice to know I’m not the only one. It’s painful, but what can you do? Commodity prices can be unpredictable. The only thing one can do is evaluate these two businesses and determine their long term health. Are real changes being made to allow them to withstand future drops in commodity prices? To pay down debt so that the businesses aren’t caught with their pants down when revenue bottoms out? To maintain cash on hand (which BBL did have, at least) and a lower payout ratio, even if the actual dividend payouts are lower? To ultimately make for a stronger business and not just a stronger dividend security? If so, buy more or hold onto what you have. If not, then consider selling.
But don’t panic and sell because of bad news. That’s the antithesis of both dividend growth investing and value investing. That’s some day trader stuff right there.
I wonder how many people are panicking and selling BBL. Many people went and sold KMI after the dividend cut; I bought more. I believe we’ll need more energy and raw materials over the long term, and these companies will be better positioned to do so once their respective commodities go back up (not to sound like I’m expecting $100/barrel oil anytime soon; that was unprecedented. But $20-something/barrel oil is just as extreme). It’s not like we’re deal with a company that makes typewriters, record players, and instant cameras; what KMI and BBL produce and deal in are not technologically obsolete and are necessary for our society.
I haven’t bought any BBL yet. I haven’t reanalyzed the business (though I bought some about six months ago and can’t imagine any huge changes that would have made the company suddenly insolvent), and I just don’t have the capital. Other stocks are higher on my priority list. A little OHI here, a little ADM there, maybe a dash of GE and some SO and T. That will all take me a year to purchase.
Don’t get discouraged. When you get discouraged, all the voices that tell you to just give up and work at your job until you’re old win.
Sincerely,
ARB–Angry Retail Banker
I disagree, energy can be disrupted by technology.
The status quo of how energy is produced and distributed can undergo technological change, but our need for energy–and our need for more energy as the global population grows and third world countries industrialize–will not disappear so easily.
Well, people are still taking pictures and typing stuff och recording stuff. It didn´t disappear.
Tom, I’m not quite sure of the point you’re trying to make.
Let´s say you buy Exxon on the assumption that there will always be a need for their product – fossile fuels. Then some new energy source comes and disrupts their business model. Sure, they have the possibility to adapt, but it is not given. I´m not making predictions on probabilities but surely you must agree that this scenario is possible?
I own some BBL and it is painful to lose some income. For me, it is just a small piece. The rest of my portfolio is still growing in terms of dividend growth. I guess my point is to fortify your portfolio such that its “okay” for 1-3 positions to fail (div cut etc)
D4s
D4S,
Same, same.. I think the overall impact was well under 2% and that’s why we diversify and don’t expose ourselves too much, right? And I agree – if 2 companies cut out of the 40+ that I own, I will take that, as the others are reinvested, stabilized/increased dividends, eh? I guess that’s why an “average” is developed right?
-Lanny
Sorry about the dividend cut news affecting you Lanny. BBL has been on a path of cut for a few months now and the yield had been skyrocketing for months. The company had to cut dividend and as you said – its coincidentally the same as the KMI cut amount.
I concur with some of the statements above – selling just after a dividend cut is probably a bad idea. The worst is probably over — unless of course, this depression in commodity prices lasts years and another cut or existential crisis occurs for the companies in this industry.
Best
R2R
RoadMap,
Yeah.. that yield had no chance of being actually sustainable at over 10%!! It was what was best for business, but now I’m wondering if they can create enough operating cash flow for a longer period of time.
Not selling either at the moment; but I need to read more on management, as well as upcoming/future results that occur and the impact (hopefully positive) that the cut had on their performance.
Let’s keep at it roadmap and thank you, again.
-Lanny
Well, the yield % only matters to a company, if they need new shares issuance to get more capital. But if the opposite is true and they buy back shares, high yield (= low stock price) can actually be accretive to their cash flow a they retire more shares on the cheap and save future dividends payments. Not sure which was it for BBL though
Hey Lanny,
Tough times! I felt your pain with KMI, but I did not own any BBL.
I almost pulled the trigger at the end of last year, but I bought some ADM instead, fortunately.
With KMI though, I sold my position.
The total loss (including received dividends) with that transaction was very close to my total dividend income of 2015… so on the bright side, you only lost your January investment!
Please remember, it is not your fault. Good luck finding better spots.
DfS
DfS,
Congrats on not owning any! NICE job buying ADM – especially with the increase they had less than two weeks ago.
I bet you found a nice use of the capital after the KMI sale. I know KMI will be back bolstering results again, but now it’s playing more tune to the market on oil, gas and other commodities. Very, very cyclical here.
Thank you, thank you very much DfS, as always.
-Lanny
Hallo Lanny,
investing comes with risks, goes with the territory. But the long term upward potential is huge. This is exactly whey a well-diversified portfolio works, most grow, some don’t, usually it balances out in the right direction.
Energy and commodities will see more pain is my guess, thereafter the banks will get a hit. Guess utilities, medical and consumer staples will be the safe places at the moment.
We actually use real estate (physical and REIT) to further diversify.
Good luck!
CF,
Thanks for posting! Well-diversification has worked decent for me, as this impact was less than 2%. I do have quite a few healthcare REITs and they’ve taken a little beating with a slight upswing this week; but utilities have been strong without a doubt. Sticking with consumers have been fun as well.
CF – diversification; and go-to’s keep us out of the dreaded waters of dividend cuts or at least feeling a big impact from one.
Thanks again for posting, talking soon!!
-Lanny
You live you learn Lanny. No worries bro. Stay tough and keep pushing yourself to better and better. I’m with you on this journey and so is everyone so let’s move on.
Now that you let it out, on to the next. Cheers bud.
Yeah that hurts, have looked at BBL for a while but never pulled the buy trigger. One of our holdings, Dream Office, just cut its dividends too. That will hurt us on our $13,000 annual goal. 🙁
It’s why you are working so hard diversify! There are downturns in industries, imagine all the holdings in your portfolio that cut or held steady their dividends in 2008/2009. If you still believe in the business, you just need to hold steady and march on.
I am not a BBL holder, but am a KMI holder and honestly, the management acted as they should have. Companies do not survive by overextending themselves by paying out capital they need to service their debt and prepare for the future.
Oil and natural gas and mining industries are not going away, at least not yet, there is no other viable alternative.
I’ve seen so many individuals in the dividend investing community sell off their stakes in these companies AFTER dividends are cut, just months after they were loading up on them because they were attractive valuations. This is a buy high, sell low strategy, which will only lead to a broken portfolio. We knew there were headwinds for the industry almost a year and a half ago. Just stay the course.
DD,
Two rough cuts for a lot of investors. I’m glad I stayed away. Was never comfortable with the debt levels. Though I followed KMI because both bulls and bears were so certain. It was fascinating leading up to the cut.
Cuts hurt the goal progress, but gotta keep on chugging.
-RBD
Hey Lanny,
Sorry to hear but utterly, utterly predictable, the share price was reflecting what was going to happen to the earnings, the management were prudent to cut the dividend. May I suggest that anyone wanting forever-growing dividends really shouldn’t choose resource stocks, they’re far too cyclical (as in up and down, not forever up). Lithium is the probably the only resource with a bright future.
BHP and every Australian resource company were extremely lucky to have China continue buying their resources during 2008-2012/2013. But with whole cities (built of steel) completely deserted in China, this was (and is) going to end one way. Oil usage is on the way down too. BHP sold off a lot of its side-commodities with South 32. The revenue for BHP isn’t going to go significantly up for a number of years. It’s relying on factors beyond its control, plus the Brazil accident law suits are only just starting.
If BHP had kept much more of its dividends in the past, they could be buying up cheap deals now. Growing, sustainable earnings are the key for growing dividends. BHP doesn’t fit into that description in my books.
Tristan
Bro, I share your pain with KMI, I’m still on the sideline regarding the energy industry. However, the market as the whole is interconnected. I’m heavy on financial sector where they make “bad” lending to oil and gas during the “prime”, some banks will face 15% bad loan write off. That’d put a dent on their bottom line. Not to mention the domino effect on REITs because some towns popped up during the oil boom, then oil bubble pop, so goes the housing market in that area. The domino has put some dent on CAT, and other materials companies.
We can see the DOW is down 10%, the S&P is 10% and such, but some companies are 25-75% down from the highs. I’m continue to make buys as long as I see value. I might see a lot of short term set back as the market is scare of any sight of a recession, I won’t know where is the bottom, but I’m pretty sure if we keep buying aristocrats, over a long period of time, the stock will go up. 😛
So, I’d keep buying to reach my goal, wait to see how the energy sector play out before buying more though. The stock will rebound long long long before we see the change in revenue. Most of the 2009 rebound was in 2009 and 2010, it came down very quickly and it also bounced up very quickly, faster than a blink of an eye. 😛
Sorry to see the decrease in your dividends. I think it goes to show for all of us who are into dividend investing that there is always risk. I don’t have KMI or BBL but do have other energy stocks taking a pounding. The way I see it, energy stocks are on sale right now. Best of luck going forward.
Hey Lanny,
Sorry to hear that bud. I do feel your pain, I’ve suffered four dividend cuts in the past two months. Gotta reduce my exposure to energy! Scary place, but it does appear as the price per barrel is bottoming… Guess we’ll see. Keep strong.
DB
Hello Lanny,
I am with you on both of these stocks plus COP… 🙁 But hopefully at least they will go back in value because on top of dividends cuts I am in a big red on all 3 of them…
Best wishes