Barclays Downgrades BHP Billiton To Underweight, Assumes Co. Will Slash Dividend By 50%

• Analysts at Barclays downgraded shares of BHP Billiton plc BLT from Equalweight to Underweight on Tuesday as part of a broader sector review.
• The experts also trimmed their price target on the stock from 900 Pounds to 515 Pounds, implying 19 percent downside.

In a report issued Tuesday, analysts at Barclays downgraded shares of BHP Billiton from Equalweight to Underweight, reducing their price target from 900 Pounds to 515 Pounds. The demotion came as part of a wider sector review.

After cutting its commodity price estimates, the firm sees BHP generating very little earnings per share, and negative earnings and free cash flow (FCF) over calendar 2016. Consequently, the experts assume the company will need to cut its dividend in half, and this should in turn result in further pressure on CEO Andrew Mackenzie.

Related Link: Credit Suisse Upgrades BHP Billiton To Outperform Amid Dividend Cut

“Even after that, FCF does not cover the dividend for at least the next 3 years implying further pressure on capex/opex and broader portfolio composition,” the research note explicated, adding that valuations generally seem “stretched.”

BHP’s stock in particular is trading on a 6.5 percent dividend yield assuming a 50 percent decrease in the dividend – compared to 8.6 percent for Rio Tinto plc RIO. This means that the shares have not fully priced in the dividend cut yet. “It is also the most expensive of the diversifieds on spot EV/EBITDA and PER metrics in 2016-17,” the report concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.