PFM 201 Principle of Financial Management Group Assignment
Contents
1. Macro-economic factors, industry factors and risks of your BHP- 4
2. Risks and factors of firm that may be associated with the performance of your BHP- 6
3. Historical and the expected return of BHP in terms of yields of dividend- 7
4. Share price trend of BHP (Yahoo finance 2021)- 9
6. Concept of diversification 11
7. Alternatives of investment 13
8. Beta coefficient as a measure of Share’s volatility 14
Introduction-
This report is based on the analysis of the chosen company for making investment of savings in that company. The company is listed on ASX and is one of the top companies of Australia. This report is based on the making decision with respect to investment in the company for good future returns. It includes analysis of various macro-economic factors and the factors of industry along with the risk involved in making investment in selected share. The firm specific factors are also been analysed and the related in the performance of the company whose stock has been selected. The expected and the historical returns are also been analysed for determining the performance of BHP limited along with past trends of dividend which is been provided by the company. It also includes the concept of diversification with other available alternatives including the beta coefficient of BHP.
The mining activities that include the preparation, screening, floating, crushing and the washing form internal part of industry of mining. The mining sectors includes exploration of minerals services which supports mining petroleum and development of sites of minerals (Britannica 2018). According to the data of mineral council of Australia it is the leading economy in the resources of minerals across the globe. Australia is known to be the largest producer for the gems and diamonds industrially along with other known minerals. GDP is the most crucial macroeconomic factor in an economy. GDP is known as the contribution that is made by the production of services and the goods in an industry for the economy as a whole. This measured using the Gross value added or the GVA of industry (IBIS world 2020).
Table 1: Annual volume of mine production indexes (MT), Australia.
Index 2008 2009 2010 2011 2012 2013 2014
Energy 118.5 113.7 127.1 118.7 120.9 126.7 134.6
Metals and other minerals 124.3 124.1 119.6 123.2 138.9 141 143.6
Source: Australian Bureau of Statistics
Hence as per the above table and sources latest contribution made by mining industry is 9 % is the largest contributor to GDP of Australia holding second position amounting to $145.73 trillion.
The factors of mining industry in Australia that affects the companies are many. Since industry of mining is major contributor to the economy of Australia. The various factors affecting the companies in the industry are the increasing rate at which the foreign control and ownership exists, increasing rates for the extractions that has the possibility of exhaustion of reserves, unwanted impacts that takes place on environment and the processing of simple pre shipment that may not be the universal neglect but rather widespread (Britannica 2018). The other major concern is the production of gases of greenhouse like carbon dioxide that results from the burning procedure of fossil fuels has made the resistance strong for the industry of coal in Australia (Britannica 2018).
For the risk factors that prevails in investing selection for investing in BHP are that the investor tend to make the investments in the best times of companies of high quality when their share are been compressed down and assessing the when the similar situation shall be avoided. Thus because at times the decreasing price of shares at due to the reasons he the investors are taking the profit out from stock and had their major focus on the short duration rather on prospects of long duration which can prove to be bad at times (IBIS world 2020).
The value of iron is the major factors behind the recent fall in the stock of BHP. Iron has lost nearly 29 % in its valuation from the beginning of this year end seems to be set for further retreating the commodity (Newman 2015). Since BHP’s major commodity is iron, hence any further fall in this commodity will impact negatively the profit of miner’s (IBIS world 2020).
The other risk factor is that as per the metal bulletin the possibility of fall in the iron ore below the level of per tonne value of US$40, where BHP and its related giants of iron of industry like (ASX: RIO) Rio Tinto ltd has been continuing to chase their targets for expansion. Because of rise in their level of output will result in high application of pressure on the prices of iron ore which will then decrease their level of margins and hence affect the profitability factors as a whole (Newman 2015).
The other concern is the prices of oil for BHP. Since it is the second major and the essential commodity in which BHP deals. Although the prices of oil have recently been recovered but the fear for further fall in the value considerable still exist. In this case also imbalance exist between the demand and supply in the market place at global level that is forcing the prices to fall (IBIS world 2020).
Reliance of BHP on the high prices of commodity for the growth of its profits similar to its fellow companies. Low prices of commodity have impacted the flow of cash for BHP at great extent which will in turn affect its ability sustaining its progressive policy of dividend. Hence if this situation is sensed by the investors in respect of their dividend being are in threat in such situation they will act swiftly and will move towards the departure from stock (Macro trends 2021).
The stock of BHP may seems to be attractive to the investors below the level of share price of $30 per share. In such situation investors are requires to analyse the situation having the opportunities that are better in the current scenario that provides with the more potential rewards and low level of risk (Newman 2015).
Based on the current scenario the dividend yield which is trailing annually for the BHP group is 3.44% (BHP 2021). This yield of dividend for BHP’s stock is at its lowest in 1 year. In the last 13 years the highest yield of dividend given by BHP has been 10.63 % and the bottommost has been 2.02 % whole median value is 3.72 % (Yahoo finance 2021). As on June ending 2020 the pay-out ratio of dividend has been 1.07 for half yearly. It can be concluded that if the pay-out ratio of dividend of BJP is too much in elevation them it may not be able to sustain its dividend since its current ratio is 0.90 which is quite elevated (Macro trends 2021).
In the last 13 years the highest pay-out ratio of dividend by BHP has been 1.89 and its least value has been 0.21 whose median value is 0.48. The forward or the expected yield of dividend for the BHP group is 3.16 % (Yahoo finance 2021). For 2020, June per share dividend given by BHP has been $1.30 for half yearly. In last 12 months the rate of growth in the per share dividend on an average for BHP has been 20.40 % whereas for the last 3 years this percentage has been annually 41.50 %, for last 5 years this rate has been 9.70 % annually and for last 10 years this percent has been 5.40 % annually (Macro trends 2021). The upper most limit for the rate of growth of dividends for the BHP for its dividend for last 13 years has been 48.50 % annually based on the highest average for 3 years whereas its least value has been -19.30 % on annual basis for which its median value is 9.50 % annually (Yahoo finance 2021).
Ticker |
Company |
Market Cap (M) |
Dividend Yield % |
BHP Group Ltd |
$ 177,650.95 |
3.44 |
(Source: Guru focus, 2021)
(Source: Guru focus, 2021)
Trailing Annual Dividend Yield = Most Recent Full Year Dividend / Current Share Price
= 2.4 / 69.720000
= 3.44 %
Forward Annual Dividend Yield = Forward Full Year Dividend / Current Share Price
= 2.2 / 69.720000
= 3.16 %
-
BHP Group Historical Annual Stock Price Data
Year
Average Stock Price
Year Open
Year High
Year Low
Year Close
Annual % Change
2021
70.2396
67.3500
73.8800
66.7800
69.7200
6.70%
2020
50.2506
54.9200
66.2800
30.9300
65.3400
19.43%
2019
52.1344
47.8600
58.9700
46.3700
54.7100
13.29%
2018
47.8137
47.5200
52.2600
43.4900
48.2900
5.00%
2017
39.3685
37.0200
46.3800
33.6700
45.9900
28.54%
2016
29.7215
25.4800
39.5700
19.3800
35.7800
38.90%
2015
40.1181
47.5400
52.5500
23.6200
25.7600
-45.56%
2014
64.7397
66.9900
73.5000
45.1500
47.3200
-30.62%
2013
68.3937
79.9300
80.4600
56.3200
68.2000
-13.03%
2012
70.5952
74.7600
82.1500
60.8700
78.4200
11.03%
(Source: Macro trends, 2021)
Volatility in the prices of share and the variation in its high and low price data for over the 10 years period -
From the data and the trend of price of share of BJP it can be concluded that the latest closing price as per the table as on 2021, February is 69.72. The stock of BHP group has the closing price of 102.68 being the all-time high price in year 2011 April (Guru Focus 2021). The high 52 week price for the BJP’s stock is 74.41 that amounts to 6.7 % according to prevailing price of share. Whereas the lowest price of share of HKIP based on its 52 week data is 29.78 which contributes to 57.3 % lower that its prevailing price of stock. The average for the price of stock of BJP has been 52.07 based on its past data of 52 weeks. The 200 days moving average has been for BJP is 58.52 whereas it’s moving average for 50 days has been 69.52. Its change based on the data f 52 week on annual basis is 34.88 %. Its 52 week change in the S&P 500 is 15.86 % (Guru Focus 2021).
Diversification is that corporate strategy which the company uses to increase the goodwill and the market share of the company by increasing the amount of sales. This aim can be achieved by introducing a new product in the market which is distinct and new to the competitors and to the customers (Bragg 2021). Diversification can be of various types:
Vertical Diversification: This type of diversification related to introducing new product in the same business. There are two options, company can introduce the product in value chain or can move back and be a supplier in the same business.
Horizontal Diversification: in this, company buys another business unit which exist in the same field or an equivalent to that field or taking small competitors in their own hands.
Concentric Diversification: This is that type of diversification in which the company uses its assets and marketing tools and other business strategies in more than one business, one is new and second is the old business.
Conglomerate diversification: This major diversification as in this there is n relation between old businesses. A business entity introduces a new product with all the new development and strategies (Gyan, Brahmana and Bakri 2017).
(Source: Wallstreet)
BHP Group uses this concept to forecast its long term growth by focusing on copper, nickel and oil for expanding its business in Australian market. On May 22, CEO of BHP group, Peter Beaven said that the company is aiming in diversifying the product line which will help in increasing the cash inflow and cash volatility can be reduced by 30%, which is due to dependence on one product that is Iron ore. According to the management the company is at risk for this idea as it will strike the strategies like transportation electrification, power of stationary, and the economic uncertainty (Barich 2019).
(Source: BHP investor presentation, 2017)
For example: J&J is a good example of Diversification as it is baby care brand, and initially started with baby cream, oil, shampoo and so. But by biding the concept of diversification, this company have introduced Medicine, oral care, which is an unrelated diversification. Also, Women care introduction in the product chain is also a good example of Diversification.
(Source: Johnson & Johnson)
There are several assets classes which can be good option to invest.
Real Estate
Real estate is a very good option to invest because of its blooming industry. This is an investment in apartments, plots, buildings, villas and so on. Apart from its good return this is a very unpredictable investment as the prices keeps on changes and can get affected by various means like social- political factors, city planning and so on.
Equity
Equity refers to the share market and it includes buying of shares, debentures and bonds of a good growing company. This will give investor a feeling of being an owner or owing a business. But this market is also very unpredictable and has a good amount of risk.
Commodities
Commodities include goods, services and properties or anything which can be traded. This investment includes buying gold, silver, copper for savings and then selling it when the prices increase so as to get good and fair returns. Prices of these commodities depend on the concept of demand of it in the market (Efinancemanagement 2021).
Beta is a risk measurement tool of security in the comparison of the market as a whole. It derives the relationship between systematic risk and expected risk in assets or shares. It works or represented as a slope of line of various data points of share price risk and market risk altogether.
If beta is equals to 1 then the share price is strongly related with market. If beta is less than one then the share price is less risky than market fluctuations and if Beta is more than 1 then the share is very high at risk.
By using this concept the investor can understand that the share of the company will move in same or opposite direction with the market performance. It also tells that how risky is the investment in that stock. For accurate results, the investor should check the r-squared value to the correct benchmark index of the market (Bragg 2021).
For example, BHP Group has a share price of $200 per share and pays 6% dividends. Beta in comparison to market is 2.6 (which mean that the risk is high). Previously Beta was 2.86 Risk free rate is 6% and investors expect to get a return of 16%.
Then as an investor should calculate the CAPM, when Beta is 2.6
= 6% +2.6 + (16%-6%)
= 19%
Return rate when Beta was 2.8
=6% +2.9 + (16%-6%)
=18%
From the calculations above it can be concludes that if the Beta decrease as share price becomes less riskier then the return from the investment increased to 19% from 18%.
Conclusion-
The above report is based on the analysis of selection of stock that is listed in ASX for making investment consultancy. This report analyses all aspect of stock for making the investment to generate suitable returns. This report includes the various aspect based which a stock is selected before making investment. This analysis also includes analysing the past trends of the price of stock of BJP which is chosen company for making investment for future. BHP is known and the top mining company of Australia and across the globe. This includes considering other diversified options as well for making investments to reduce the possibility risk in the returns by using the concept of Beta.
References-
Barich, A., 2019. BHP flags copper, nickel, oil focus in further diversification from iron ore. [online] Spglobal.com. Available at: <https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/bhp-flags-copper-nickel-oil-focus-in-further-diversification-from-iron-ore-51983042> [Accessed 13 February 2021].
BHP, 2021. Shareholder information. BHP, [Online], Available at: https://www.bhp.com/investor-centre/shareholder-information/current-share-price/. [Accessed on: 12/02/2021]
Bragg, S., 2021. Beta coefficient definition. [online] Accounting Tools. Available at: <https://www.accountingtools.com/articles/2017/5/10/beta-coefficient> [Accessed 13 February 2021].
Bragg, S., 2021. Product diversification definition. [online] Accounting Tools. Available at: <https://www.accountingtools.com/articles/product-diversification.html> [Accessed 13 February 2021].
Britannica, 2018. Minerals and mining. Britannica, [Online], Available at: https://www.britannica.com/place/Australia/Power-and-resources. [Accessed on: 12/02/2021]
Efinancemanagement. 2021. Alternative Investment – Meaning, Features and Types. [online] Efinancemanagement. Available at: <https://efinancemanagement.com/investment-decisions/alternative-investment> [Accessed 13 February 2021].
Guru focus, 2021. BHP Group Dividend Yield %. Guru focus, [Online], Available at: https://www.gurufocus.com/term/yield/NYSE:BHP/Dividend-Yield-/BHP-Group. [Accessed on: 12/02/2021]
Gyan, A.K., Brahmana, R. and Bakri, A.K., 2017. Diversification strategy, efficiency, and firm performance: Insight from emerging market. Research in International Business and Finance, 42, pp.1103-1114.
IBIS world, 2020. Mining - Market Research Report. IBIS world, [Online], Available at: https://www.ibisworld.com/au/industry/mining/55/. [Accessed on: 12/02/2021]
Macro trends, 2021. BHP Group - 34 Year Stock Price History | BHP. Macro trends, [Online], Available at: https://www.macrotrends.net/stocks/charts/BHP/bhp-group/stock-price-history. [Accessed on: 12/02/2021]
Newman, R. 2015. 5 reasons why BHP Billiton Limited could be a risk to your wealth. The Motley Fool, [Online], Available at: https://www.fool.com.au/2015/04/20/5-reasons-why-bhp-billiton-limited-could-be-a-risk-to-your-wealth/. [Accessed on: 12/02/2021]
Yahoo finance, 2021. BHP Group (BHP). Yahoo finance, [Online], Available at: https://finance.yahoo.com/quote/BHP/key-statistics?p=BHP. [Accessed on: 12/02/2021]
