By Paul Rickard

BHP Biliton Chairman Jac Nasser might have been re-elected last week at the company’s AGM with 99.6% of the votes cast, but I reckon it is time for Jac to do the honourable thing. Someone has to be accountable for the destruction in shareholder wealth that has occurred over the last 5 years. Like Woolworths, where ultimately both the CEO and Chairman fell on their swords, there needs to be some blood at BHP.

And in case you haven’t felt the pain of BHP shareholders, since peaking at a high of just over $46 in February 2011, BHP shares have fallen to under $20. For the combined Australian and UK entities, the market capitalization has fallen from $230 billion to just $103 billion today - a loss for shareholders of a staggering $120 billion. 

So much for the “big Australian”.

Jac is of course not to blame for the fall in the share price due to lower earnings from weak commodity prices. With iron ore, copper, oil and coal now trading near decade lows, BHP’s EBITDA has fallen from US$32.9billion in 2011 to $21.9 billion in 2015.

 

However, since taking the reign as Chairman in March 2010, Jac has presided over a number of BHP blunders. Consider this list for starters:

The failed US$43 billion offer to takeover Potash Corporation (August 2010);

  • More than US$20 billion spent buying shale oil and gas interests in the US at the peak of the boom in 2011. $4.75 billion was spent buying tenements in Arkansas, and $15.1bn to takeover American shale gas and oil pioneer Petrohawk. This year, BHP impaired these assets by taking a charge of US $2.8 billion, with probably more to come next year;
  • The ongoing saga of Potash. Is this BHP’s fifth pillar or not? Since 2013, another US $2.6 billion has been earmarked for capital expenditure on Jansen - with no returns in sight for shareholder;
  • The demerger of South32, which cost shareholders more than $600 million in transaction and stamp duty costs;
  • BHP’s consistently overoptimistic forecasts on commodity prices, and Chinese demand for raw materials. For example, as recently as March this year, BHP was forecasting Chinese crude steel production to peak at 1.1 billion tonnes in the mid 2020s, compared to other forecasts of around 700m tonnes - a small gap of circa 400m tonnes. These forecasts have led to poor capital investment decisions, overproduction and until recently, poor discipline on operational costs;
  • And the progressive dividend policy.  

The progressive dividend policy will go

I am not against the progressive dividend policy per se, although some investors argue that capital growth should be the focus of a company like BHP rather than income returns to shareholders. However, I do think BHP has been reckless in its communication of the policy, reckless in putting no caveats or “ifs and butts” about the payment of dividends, and reckless in not coming clean last week about abandoning the policy.

If you are not familiar with the policy, it says that BHP is committed to maintaining or increasing its base dividend in every period. For example, BHP paid a dividend of 116 US cents per share for FY 13, 121c for FY 14, and 124c for FY15. Maintaining this policy would mean a dividend of at least 124 US cents per share for this year, which at last night’s closing share price of $19.67 and FX rate of 0.7250, puts BHP on a prospective dividend yield of an astonishing 8.69% pa. And, the dividend would be fully franked!

Unless the commodity price cycle bottoms soon, it is inevitable that this policy will go. Either that, or BHP cuts capital and project spending to the absolute bone or borrows money to pay the dividend. No one thinks the last two options make much long term sense.

124 US cents per share on 5.3 billion in shares means an annual dividend payment of US$6.5 billion. In FY 15, underlying EBITDA was US$21.9 billion. In the second half, it was down to US$7.4 billion- a run rate of around US$15 billion. Commodity prices have fallen further, the Samarco tragedy has occurred, and even if capital expenditure is squeezed lower than the current plan of $8.5 billion in  FY 16, this year’s dividend looks shaky.

Yet surprisingly, Chairman Jac Nasser couldn’t own up to the change in policy at last week’s AGM. Rather than state the obvious - commodity prices are at decade lows and show no sign of bottoming, and hence it would be irresponsible of your Board to continue the policy - he fumbled the ball. Badly!

Look at what he had to say at the AGM:

“I thought it would be helpful to address questions which the Board and management have received about our dividend.

As I said at the London AGM, the dividend is an outcome of appropriate capital management. Our starting point is to maintain the strength of the balance sheet through the cycle. The balance sheet must always come first.

As you would expect, and has always been the case, your Board reviews the level of dividend on a regular basis. It does this against the background of the external environment, our progress on capital and operating productivity and the need to invest to ensure profitable long-term growth.”

Why can’t he just be straight with shareholders and say that the policy been discontinued or suspended?

Time to go, Jac

Almost 6 years into the job as Chairman and more than 9 years on the Board, it’s time to go, Jac. In the Westminster tradition, the buck has to stop somewhere. CEO Andrew McKenzie has only been in the job since May 2013, and he can’t be held accountable for some of the blunders detailed above. With more than $120bn of shareholders wealth destroyed, it is not unreasonable for shareholders to demand new leadership at BHP.