Credit Suisse Upgrades BHP Billiton To Outperform Amid Dividend Cut

• BHP Billiton Limited (ADR) BHP shares have plunged 50 percent year-to-date, having declined steadily since mid-May.
• Credit Suisse’s James Gurry upgraded the rating on the company from Neutral to Outperform, while reducing the price target from 1,100p to 900p.
• BHP Billiton must cut dividend by half and protect its balance sheet the way it has protected the quality and value of its assets, Gurry stated.

Analyst James Gurry believes that BHP Billiton would not be able to sustain its annual dividend at $1.24, and that the company must rebase this by half. Assuming there is a 50 percent dividend cut, BHP Billiton would be able to hold debt levels at around $25bn over the next 2 years, during which commodity prices are expected to be weak.

Gurry added, “Div yield would still be 5%+ and we include a $2bn provision ($4bn in total) for Samarco reflecting BHP's 50% interest.”

BHP Billiton has been able to protect the quality and value of its assets by ensuring “a consistent and sufficient” level of maintenance capex. The analyst believes that the company should follow the same approach to the balance sheet and the investment case, by rebasing the dividend.

Management could comment on revisiting its dividend policy, during the upcoming interim results, Gurry commented. He pointed out that the chairman's AGM comments in November indicate that the company understands the need to avoid destroying its balance sheet “for the sake of the dividend.”

“The world has clearly changed - witness our commodity price revisions - and a dividend cut already seems priced in by the market - suggesting any shareholder backlash is likely to be limited (but nevertheless disappointing),” Gurry added.