Should I Buy BHP Billiton?

LONDON -- Investors in mining company BHP Billiton  (LSE: BLT  ) (NYSE: BBL  ) have had a rocky time lately.

Its share price is down 15% over three months, 20% over two years (against a 10% rise for the FTSE 100) and is flat over five years.

So much for the much-hailed commodity supercycle. Miners are down generally, so is now a good time to buy?

Last time I looked at BHP Billiton, in October, I couldn't see much wrong with the company. And I still can't.

Management has been hitting growth targets, sticking to budgets, reducing costs, and delivering a progressive dividend -- with compound annual growth of 24% over the last 10 years.

The group's massive diversification limits its exposure to any single commodity or currency. Like the rest of the mining sector, however, BHP Billiton is exposed to events beyond its control, primarily in China.

Great mining share disaster
China continues to slow, hitting its once insatiable demand for commodities. The IMF recently trimmed its 2013 growth forecast for the country to 7.75%. That's only a slight dip from the 7.8% seen in 2012, but there are other worries.

Chinese PMI manufacturing growth came in at 49.2 in May, signalling contraction, according to HSBC. Consumer price inflation is slowing as demand weakens, while bank lending is shrinking. Debt is the biggest worry, up from 125% of China's GDP to 200% in the last four years.

"QE" is the second pit prop supporting strong commodity prices, and with the U.S. Federal Reserve openly seeking the exits, that could also collapse.

Falling commodity prices knocked BHP Billiton's first-half profits down 14% to $32.2 billion. But where there's risk, there's potential reward.

First, the valuation looks tempting. With BHP Billiton trading at just 8.7 times earnings, against 12.75 for the FTSE 100 as a whole, China and QE seem to be largely priced in. 

What's more, income investors will be drawn to the yield, which is covered a healthy 2.9 times by profits and is now 4%. That beats the FTSE average of 3.6%.

BLT for me
With operating margins of 33% and a return on capital employed of 22.7%, BHP Billiton knows what it's about.

A forecast 28% drop in earnings per share for the year to June 30, 2013, looks dismal, but profits are forecast to rebound sharply by 21% in the next 12 months. By then, the potential dividend yield could be a bright and shiny 4.5%.

I used to buy mining companies for growth, but now BHP Billiton looks a strong income play. There may be further troubles ahead, but if you're a long-term bull, you should be buying a company such as BHP Billiton when it is down. Or maybe you would rather wait until it is expensive again?

Indeed, if it's income you're after, you might also want to go shopping for Motley Fool's favourite stock pick.

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