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BHP has hit a near four-year high – is it time to sell?

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Key statistics: ASX: BHP
Closing share price 31.07.18: $35.170
52-week high: $35.280
52-week low: $25.300
Most recent dividend: 70.585c
Annual dividend yield: 3.61%
Franking: 100%

BHP is on track to post a net profit of about $US10bn this year, 10 times as much as it made just two years ago.

Commodity prices have improved, results have recovered and cash flow has ballooned.

Aided by higher commodity prices, revenues are up about 50% since 2016 and earnings before interest, tax, amortisation and depreciation (EBITDA) have doubled. The cyclical recovery is complete.

The clearest change has come from capital expenditure which, having peaked at over $US22bn in 2013, has now fallen to a sustainable $US5-6bn. This has had a tremendous impact on free cashflow.

We expect BHP to generate free cash flow of about $US10bn in the 2018 financial year. Even with the higher share price that equates to a free cash flow yield close to 6%.

To that you can add a handy franking balance and an expected $US10bn cash injection from the sale of its US shale assets. With BHP no longer profligate with profits, cash returns are soaring.

Careful capital expenditure has been mimicked across the industry and miners have refrained from increasing supply. In fact, the bulk of spending across the industry is going towards replacing production, with very little net production growth. All that bodes well for sustaining current rates of return.

BHP has been thoroughly modernised and improved and is finally exploiting its asset base the way it always should have. Free from the burden of getting bigger, BHP has become better and, we suspect, this could be a long-term change.

We’re raising our buy price from $23 to $25 and sticking with HOLD.

Staff members may own securities mentioned in this article

Written by Gaurav Sodhi

Gaurav Sodhi

Gaurav Sodhi is the deputy head of research at Intelligent Investor, owned by InvestSMART Group. This article contains general investment advice only (under AFSL 282288). To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.

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