Why I don’t own BHP shares (yet)

A young man sits at his desk with a laptop and documents with a gas heater visible behind him as though he is considering the information in front of him. about the BHP share priceA young man sits at his desk with a laptop and documents with a gas heater visible behind him as though he is considering the information in front of him. about the BHP share price

I like to own ASX shares that I could potentially own forever. Certainly, BHP Group Ltd (ASX: BHP) could be one of the names that enters my portfolio at some point.

BHP has already shown that it has excellent longevity. It’s one of the oldest businesses on the ASX at more than 100 years old.

I believe that resources are always going to be in demand around the world. BHP has a diversified portfolio of commodities including iron, copper, nickel, and coal.

Typically, I don’t think that many commodity businesses can make great investments. However, at the right price, I think a forward-thinking business is worthwhile, particularly if it’s able to generate strong profits when commodity prices are favourable.

Keep in mind that I already own Fortescue Metals Group Limited (ASX: FMG) shares in my portfolio, so owning BHP shares at some point wouldn’t be too much of a stretch.

Why I’m not invested already

BHP is already one of the biggest businesses in the world. It’s the biggest Australian company and for that reason, it could be tricky for the business to achieve substantial capital growth.

According to the ASX, it has a market capitalisation of $243 billion. For it to organically double in size, it would need to be worth almost $500 billion. Therefore, I’d want to buy at the right price.

After a 30% rise over the last six months, I think it has experienced such a large jump because investors have become optimistic about the positive impacts of China’s COVID-19 reopening.

Yet the demand for iron can be cyclical. I think, at some point, there will be another lull and this could lead to a lower price for iron — and BHP.

As a bonus, if I’m able to invest at a lower BHP share price then I’d also be getting a stronger future dividend yield as well.

Why I like BHP shares

I like that BHP is focusing on greener commodities like copper, nickel, and now potash.

Potash is seen as a greener form of fertiliser. BHP is working on the Jansen project in Canada, which could generate a high earnings before interest, tax, depreciation and amortisation (EBITDA) margin once it’s fully operational.

If the world is going to decarbonise then it needs a lot more copper, nickel, and so on. BHP’s scale gives it the potential to be a very low-cost producer and earn high margins.

I like that BHP has committed to a relatively high dividend payout ratio, which should mean solid cash returns each year, even if the share price is volatile.

If I can buy BHP shares at a good share price, then I’ll be able to buy at a level that gives me a good margin of safety.

What price am I looking for? Certainly under $40, perhaps under $37.50. I don’t mind if it takes months or even a few years for that price to come along – patience is important when it comes to investing in ASX shares, in my opinion.

The post Why I don’t own BHP shares (yet) appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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 Scott Phillips.

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