Here’s why I think the BHP Billiton (ASX:BHP) share price could be on the way to $40

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ASX:BHP

The BHP Billiton (ASX:BHP) share price is in overdrive Wednesday morning, jumping $1.05 or 3.2 per cent higher to $33.55 after the mining giant reported strong production numbers for FY18.

BHP is in a sweet spot: production is high, commodity prices are high, five major projects are under development, and bids have been received for the sale of its US shale oil assets.

All this will likely translate into a bumper BHP dividend.

According to Commsec, estimates for the full year dividend are around $1.58, meaning BHP shares are trading on a forecast fully franked dividend yield of 4.7 per cent, or 6.7 per cent when grossed up for franking credits.

I think there’s a decent chance BHP’s full year dividend could be even higher, given the company is minting cash right now.

Such an attractive return is why BHP shares made it into The Capital Club’s list of six of the best dividend stocks on the ASX for 2018 and beyond.

The biggest risk is Trump

The biggest risk with mining shares like BHP and Rio Tinto (ASX:RIO) is a slowdown in China, something that would see commodity prices fall. The risk is more heightened as Trump’s tariffs threaten a trade war between China and the US.

You don’t have to look too far to find predictions of doom, gloom and stock market crash.

Only yesterday, BlackRock chief executive officer Larry Fink said shares could drop 10 per cent to 15 per cent if the Trump administration sees through its threat to levy tariffs on an additional $US200 billion of Chinese imports.

Like all commentators, and indeed all mining companies, including BHP and Rio, I don’t know what’s going to happen with tariffs, trade wars, and especially Trump.

Unlike some commentators, I don’t pretend to know exactly what’s ahead for China, the stock market, and indeed the BHP share price.

So I take precautions, like running a decent-sized cash balance and having a diversified portfolio.

Life is about taking risks. Whether you buy a house or rent. If you have children, and how many. Who you work for, what you earn, and what job you do. What you eat and drink. Heck, driving a car everyday is a risk.

Stock market investing has an element of risk. Much more so when viewed over the course of weeks and months, rather than years and decades.

In return for taking on the risk of investing in the share market, you get the opportunity to earn an outsized return.

On average, the stock market has gone up about 10 per cent per annum, over the long-term. Compare that to the 2 per cent risk-free return you can currently earn in a term deposit, or the riskier 4 per cent rental yield you can current earn on an investment property.

Here’s why BHP shares could hit $40

The bottom line is an investment in BHP shares today offers you an attractive gross dividend yield, and the potential for capital appreciation.

It’s not risk free. But nor should it be, given the 6.7 per cent forecast gross dividend yield on offer.

I own BHP shares, I think the current mining boom has several more years to run.

Under CEO Andrew Mackenzie, BHP is running a tight ship, with a laser focus on shareholder returns.

Commenting today, he said “Good prices and our culture of continuous improvement give us positive momentum into the 2019 financial year.”

Last month, analysts at Macquarie placed an outperform rating on BHP shares, and a $38 share price target.

I think they can go one better, with there being a decent chance BHP shares could hit $40 by the end of 2019, an almost 20 per cent increase from here.

The 6.7 per cent gross dividend yield is gravy on top.

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au