BHP Billiton Ltd. is slashing its dividend. This is good news. As painful as the cut might be in the short term, it demonstrates that management is finally recognizing the extent of its long-term challenge.
Until Monday, the world’s largest miner had stubbornly stuck to a progressive dividend policy despite years of falling commodity prices. BHP had promised to maintain or increase payouts year after year, even if it cost the company billions in badly needed capital.
It was an act of hubris. Trying to strap an ever loftier dividend onto the unpredictable ups and downs of the commodity market brings to mind a certain story that involves making wings out of wax, flying too close to the sun – and you know how it goes from there.
Fortunately, BHP’s story is no longer headed for a splash. The end of the company’s outrageously large dividend demonstrates that chief executive officer Andrew Mackenzie has finally recognized the extent of this commodity slump and rearranged priorities to reflect what is most important in today’s mining industry.
Among other things, that means putting the needs of credit-rating agencies ahead of yield-hungry shareholders. BHP has $32.5-billion (U.S.) in debt, so maintaining an elevated credit rating is vital to its financial health. Any significant downgrade would send its cost of borrowing soaring.
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