The BHP Group Ltd
(ASX: BHP) share price is an interesting ASX share to think about right now.
BHP is generating an enormous amount of profit from its iron ore division.
Iron ore prices have been really strong and BHP has been producing lots of iron ore to capitalise on that.
The resources giant told investors that in the fourth quarter of FY21 it saw its iron ore production increase by 9% (compared to the March 2021 quarter) to 65.2 Mt.
That brought FY21 iron ore production to 253.5 Mt, which represented a 2% increase on FY20. That strong iron ore price and production were helping profit, dividends and the BHP share price.
But now the iron ore price is dropping…
The iron ore price is sinking, but it’s still very high compared to historical prices.
I don’t think anyone truly expected those prices for iron ore to stick around for a long time. It has probably been stronger for longer than what investors were expecting.
But now it causes some difficulties for investors in iron ore companies.
How much is BHP worth if the iron ore price has fallen by a quarter? And will it keep dropping further?
An iron ore price of US$125 or US$100 would still be a very reasonable price.
China is apparently turning the screw to try to hurt the iron ore price (and Australia).
The tricky thing is, China is by far the biggest customer of iron ore. What do you do when the customer doesn’t want to pay such a high price and has most of the market power?
The BHP share price hasn’t fallen by 25% in response. The iron ore price may yet rebound higher, though that’s not looking likely.
Silver linings
Compared to some of its peers, BHP is much more diversified. The lion’s share of profit does come from iron ore, but it also has copper, coal and oil as major profit contributors.
Also, there’s a reason why resource businesses never trade at a high price/earnings ratio when commodity prices are strong – the market is expecting a decline at some point.
The BHP share price has performed strongly, but there’s not much chance of a 75% drop or more of the share price.
Dividends can continue to play a major part in the total shareholder returns from BHP. The business has had a huge FY21, so that big final dividend is to come. And if the iron ore price remains above US$100 per tonne then the business can continue to produce attractive profit, just not as big as FY21.
BHP share price valuation
According to CommSec, the BHP share price is now valued at 9 times the FY22’s estimated earnings.
The financial data also suggests BHP could have a fully franked dividend yield of 8.6% in FY22.
However, it’s hard to know if BHP is a good one to consider because of the importance of commodity prices to performance. Those commodity prices are going to be volatile (at a minimum) and could fall quite a lot from today.
There are other ASX dividend shares I’d rather look at for more consistent dividend income and that have more control of their profit outlook.
