Mining giant BHP cut its dividend for the first time in 30 years last week, which will hurt investors in the short term but pay off down the track.
BHP slashed its first-half dividend by 75 per cent, from US62c to US16c.
As the mining downturn continues to bite, it has abandoned its long-established progressive dividend policy, under which every year it increased its dividend or at least held it steady.
This is terrible news for the investors relying on the steady income from the mining giant. There will be a lot of retirees rethinking their holiday plans.
The news could have been a lot worse. BHP's new dividend policy is to pay out 50 per cent of what it calls "underlying attributable profit" - and on the most recent result that would have been just US4c. It looks as if the board tried to soften the blow with a US12c special dividend as well.
The company says by retaining more cash it will have a strong balance sheet (that is, not too much debt) and flexibility to invest during the downturn.
Flexibility to invest will pay off in the long run.
Presenting the miner's first half results, chief executive Andrew Mackenzie said the company will use its extra financial firepower to look for "tier one assets in distress".
In other words, it's scouring the globe for struggling miners to take over, the idea being that it will acquire them cheaply and reap the rewards when commodity prices start to rise.
This makes a nice change from the way most miners behaved at the peak of the mining boom, snapping up rivals at inflated prices and throwing investment capital at new projects as if the boom would go on forever. But of course it didn't and many miners, BHP included, have been lumbered with assets worth a lot less than they paid.
The new policy is the sort of patient long-term planning that we see from Asian investors and companies, but rarely in Australia.
The company has signalled it will also take a cool-headed approach to any acquisitions, saying it will be "exceptionally difficult" to fine quality assets at the right price.
BHP reported a first half loss of US$5.7 billion, thanks mostly to large write-offs of oil and gas assets that are worth less than they were a year ago.
Even if we take out those items, the underlying result isn't much better. Underlying first half profits fell 92 per cent from US$4.8 billion to US$412 million. As the prices of its four main commodities - iron ore, coal, copper and oil - fell sharply.
Interestingly, the BHP share price rose 3 per cent on the day it announced its new dividend policy. Was this a sign that investors were also starting to take a longer term view and were prepared to give up short-term gain for much greater rewards in the future?
Alas, no. The next day they fell over 8 per cent, their biggest plunge since the global financial crisis in 2008, as analysts questioned the company's ability to make quality acquisitions (certainly its track record hasn't been great) and wondered whether it might be drawn into a bidding war with other global mining giants pursuing the same strategy.
Maybe, but all power to BHP for having a go instead of pulling down the shutters and returning cash to shareholders to support the share price.
It's fair to say BHP shareholders aren't having a good time. On top of the dividend cut is the share price plunge. Only five years ago, BHP shares were trading at nearly A$45, now they're down at A$16.
However, commodity prices will recover. Uneconomic mines will be shut down, addressing the global oversupply problem, and the global economy will come back to life, increasing demand. When that will be is anybody's guess, but it will happen. And when commodity prices do improve, BHP should be well positioned to take full advantage of them, and patient shareholders will be rewarded.
Earnings season looks good
We're now halfway through the earnings season and so far it's been a lot better than most people expected. It's one of the stronger earnings in the post-global financial crisis period.
Of those companies which have reported, nearly half have beaten analysts' expectations for their earnings by 2 per cent or more, according to an analysis by Goldman Sachs.
Qantas unveiled a record half year profit of A$921 million; strong housing demand helped building materials and property companies including Boral, Mirvac and Stockland to better results; and electronics retailers Harvey Norman and JB Hi-Fi reported impressive profit jumps.
All of this suggests Australia's domestic economy might not be doing too badly after all.