3 things about BHP stock every smart investor knows

Owning BHP Group Ltd (ASX: BHP) stock means having a small piece of Australia’s biggest company. There are a number of things investors should know about it.

BHP currently has a market capitalisation of around $240 billion, compared to $191 billion for Commonwealth Bank of Australia (ASX: CBA).

Its market capitalisation is not the most important thing to know about the ASX mining share. I’d suggest it’s important to know the following three things.

The iron ore earnings are cyclical

Humans seem to have a habit of assuming that what’s happening in the short term will continue for a long time. Sometimes that’s correct. But it’s important to recognise that some things are likely not to continue forever, particularly when they have a history of being cyclical.

Iron ore supply and demand is definitely one of those things I’d call cyclical. Most of the world’s iron ore is bought by China – sometimes demand is strong from the Asian superpower and sometimes not.

The iron ore price is currently around US$130 per tonne, but it has been under US$90 per tonne a couple of times in the 2020s so far. While BHP and other ASX iron ore shares are able to make big returns right now, thanks to growing demand in China for things like (electric) vehicles, the Chinese property market is currently reportedly weak.

It’s important not to assume that the iron ore price will stay at U$130 per tonne for years or even months.

At the moment, the estimate on Commsec suggests BHP could generate earnings per share (EPS) of $4.10, putting the BHP stock price at 11 times FY24’s estimated earnings.

BHP is a world leader

While the market capitalisation doesn’t necessarily do much to help the company make more profit, its enormous operating scale does help.

It’s one of the biggest mining businesses in the world and one of the lowest-cost miners globally.

In the ‘bad’ times, being a very low-cost operator means that it can continue making a profit even if conditions are bleak. In the good times, it means it can make exceptional profits and returns.

When the business is making good profits it can pay very pleasing dividends. The company currently has a minimum dividend payout ratio of 50%. For FY24, this could translate into a grossed-up dividend yield of 6.9% according to the estimate on Commsec.  

It’s actively diversifying towards greener commodities

BHP is best known for being an iron ore miner, but the company is working on growing its non-iron exposure and earnings.

For example, it recently acquired OZ Minerals which increased its exposure to copper.

It’s also working on a large potash project in Canada called Jansen. Potash is seen as a greener fertiliser, which could be helpful in a decarbonising world. It’s expected to earn an attractive earnings before interest, tax, depreciation and amortisation (EBITDA) margin and have a long economic life.

The world’s commodity demand changes as years go by, so having a greener focus could be increasingly important for BHP stock.

The post 3 things about BHP stock every smart investor knows appeared first on The Motley Fool Australia.

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More reading

• 7 must-see results this ASX reporting season before buying or selling
• Which major ASX mining share will pay the biggest dividend this year?
• Are investors underestimating ASX iron ore big-wigs this earnings season?
• Why is the BHP share price starting the week with a whimper?
• Buy ANZ and this ASX dividend share

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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