The BHP Group Ltd (ASX: BHP) share price has outperformed the S&P/ASX 200 (INDEXASX: XJO) (^AXJO) since the beginning of 2019, climbing 10.4% versus 9.9% for the ASX 200 index.
However, including the prospect of its BIG special dividend, which we covered here, BHP shares have been a great performer over the past few months.
Even if you compare BHP shares to the performance of the S&P/ASX 200 Net Total Return (INDEXASX: XNT) index, the ASX 200 index which includes share price gains and dividends, you’ll see that BHP is coming out ahead.
But any internet user can read a share price chart, right?
The key question on every BHP shareholder’s mind is what happens next. Although past performance is a poor indicator of future performance, like a mosaic we can put some pieces together to get a decent view of the future.
What BHP Does
BHP is a world-leading resources company, extracting and processing minerals (like iron ore and copper), oil and gas, and has more than 62,000 employees and contractors, primarily in Australia and the Americas. Headquartered in Melbourne, BHP has shares listed on both the ASX and London Stock Exchange (BHP Billiton Plc).
Around one-third of BHP’s revenue comes from iron ore extraction and sales. Iron ore is a key ingredient in steel, which is used in roads and infrastructure projects such as those in China, India, smaller Asian countries and elsewhere. Coal, another steelmaking ingredient and energy source, accounted for around 20% of BHP’s revenue last year. Copper (30%) and Petroleum (12%) round out the business.
Price Taker
Going forward, BHP’s key operations are likely to be its high margin copper and iron ore businesses, which supply key resources driving much of the world’s growth.
However, as our lead investment adviser recently wrote in this article, “3 Reasons I Don’t Own BHP shares”, BHP’s revenue can be highly sensitive to the supply and demand of these commodities. In other words, although it is a great business with scale and defensive features, predicting the prices of BHP’s products with certainty is close to impossible.
2019 Outlook
BHP’s CEO recently said he expects a strong second half, with unit costs expected to improve across the business. But, the easy returns have probably already been made, given the special dividend and buy-back.
What’s more, given BHP is a price taker (not a price maker) we would rather focus on ASX shares with more predictable growth prospects. Fortunately, some of them (like the three in the report below) also pay generous dividends!
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