The BHP Group Ltd (ASX: BHP) share price has been a positive performer in 2020.
Since the start of the year, the BHP share price has gained approximately 11%.
And if you add in the $1.75 per share dividends the company has paid during the 12 months, this gain stretches to over 15%.
This compares to a largely flat S&P/ASX 200 Index (ASX: XJO).
Why has the BHP share price outperformed in 2020?
The key driver of the company’s share price outperformance in 2020 has been a rise in the iron ore price. This has been driven by supply constraints in Brazil and robust demand in China as it spends big on infrastructure to reignite its economy.
Given the significant contribution that iron ore makes to its overall profits, a surging iron ore price is a huge positive for BHP.
At the time of writing, the spot iron ore price is fetching US$159.85 a tonne. While this has slipped from its recent highs, it is still around 70% higher than where it started the year.
It is also materially higher than what BHP pays to pull the steel making ingredient out of the ground.
The Big Australian has provided cost guidance of US$13 to US$14 a tonne for its iron ore operations in FY 2021. This means it will be generating high levels of free cash flow right now.
And given the strength of the company’s balance sheet, this is likely to lead to very generous dividend payments next year.
What else is support the BHP share price?
It isn’t just iron ore that is supporting the BHP share price.
Also rising this year was the copper price. The base metal is up strongly this year and has been trading at multi-year highs.
And while oil prices have been subdued, they are still trading at a level that make its petroleum business profitable.
Can its shares go higher?
One leading broker that believes there BHP share price can still go higher in 2021 is Ord Minnett.
Its analysts recently retained their buy rating and lifted the price target on its shares to $50.00.
The broker is also forecasting a fully franked ~$2.39 dividend in FY 2021. Based on the latest BHP share price of $43.14, this represents a 5.5% dividend yield.
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Returns as of 6th October 2020
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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