BHP Downgraded to Neutral - Analyst Blog

We downgrade our rating on BHP Billiton Ltd. (BHP) from Outperform to Neutral based on the recent floods in Australia. The flood has forced closure of mines, reducing production levels, particularly when the market is improving and metal prices are reaching for the sky. This is going to have a negative effect on the operating results in the near term.

Moreover, BHP Billiton's assets, earnings and cash flows are influenced by a wide variety of currencies due to the geographic diversity of the countries where it operates. Fluctuations in the exchange rates of those currencies may have a significant impact on the financial results as the majority of the company's sales are denominated in the US dollar.

However, over the longer term, we are optimistic about the ongoing industrialization in China, the largest iron-ore importer, which will improve the demand and price of its products. Fiscal 2010 bears evidence of the fact that both demand and prices improved due to a strong recovery in China and India.

BHP Billiton's commitment toward long-term growth through its key investment strategy looks promising with 20 projects on hand. During fiscal 2010, BHP delivered five growth projects and approved two major growth projects with a total budget of $695 million and made pre-commitments totaling $2,237 million to start work on four other projects. The company, at present has 20 projects on hand for a total budget of $25 billion.

Moreover, the progressive dividend policy enhances shareholder sentiments and confidence and inspires our optimism about the stock. During fiscal 2010, the company paid a dividend of $0.87 per share, up from $0.82 in fiscal 2009, which represents an increase of 17.1% from fiscal 2008. At present BHP Billiton maintains its short-term Hold rating (Zacks #3 Rank).