If you had invested US$100 in the ASX 200 Index five years ago, that money would be worth US$131 today.
BHP’s management decided to “Think Big” instead of thinking about shareholders – and destroyed billions in shareholder value in the process: FOOTNOTE 2
- US$853 million in franking credits wasted due to an obsolete dual-listed company structure
- US$9 billion destroyed through share buybacks made at inflated market prices
- US$23 billion destroyed through the ill-fated foray into US shale
- US$8 billion spent on petroleum exploration activities with no apparent value created
So what would THINKING SMART look like at BHP?
Unify and incorporate BHP in Australia to stop the destruction of franking credits
Despite BHP’s decision over two years ago to spin off most of the businesses acquired in the 2001 merger with Billiton, the company has maintained an obsolete, dual-listed company (DLC) structure, consisting of BHP Ltd. in Australia and BHP Plc. in the U.K. Today, this structure is leading to the destruction of valuable franking credits – since 2015, US$853M of franking credits have already been wasted, instead of being distributed to shareholders.
Since the spin-off, BHP Plc. no longer generates an equal share of the profits.FOOTNOTE 4
But when BHP pays a dividend, it has to pay the same amount to shareholders of Ltd and Plc.
So Ltd. has to transfer profits – and the related franking credits – to Plc.
But since Plc. cannot distribute the franking credits, they are wasted.
THINKING SMART would mean stopping the waste by creating a single, unified BHP – incorporated, headquartered and listed in Australia.
Optimizing the value to shareholders of BHP’s significant balance of stranded franking credits via the unification of its legacy DLC structure could lead to US$11 billion of value created.
Increase returns through dividends, buybacks of stock, and improved capital allocation
Analysts’ consensus forecasts are clear: BHP is expected to have significant free cash flow for the foreseeable future. We propose more of those earnings are returned to shareholders over time, as additional dividend income and through efficient buybacks of stock. This is important, because many Australians hold BHP shares as part of their superannuation funds.
THINKING SMART would mean a unified, Australian BHP using more of its free cash flow to make the most of Australia’s unique and valuable franking credit system through dividends and efficient share buybacks.
As the chart below shows, whether for a 15% Australian taxpayer or an Australian retiree paying 0% in drawdown, a unified BHP with smart dividend and buyback policies could deliver twice as much return over five years on a $10,000 investment in BHP – effectively doubling Australian shareholders’ yield:
BHP’s capital allocation should be improved by a policy that compares the potential returns on any future investment with those that can be achieved through buying back its stock at a discount. Dedicating more free cash flow to discounted buybacks could lead to significant value accretion and create US$20 billion of shareholder value.
Exit shale and review petroleum’s place in the portfolio
BHP’s foray into US shale has been disastrous, and its overall petroleum portfolio is in need of review. These petroleum assets are deeply undervalued, by as much as US$15 billion, as part of current BHP. A strategic review could lead to solutions that would unlock the full value of these assets for BHP shareholders.
BHP’s misguided attempts to diversify risk through its involvement in the petroleum sector have destroyed significant shareholder value. In US shale alone, 78% of the value invested in these assets has been lost. FOOTNOTE 7
THINKING SMART would mean maximising the value of BHP’s petroleum assets by conducting a full review of alternatives, such as a demerger of the US petroleum business or a sale of these assets to local specialists who are prepared to pay more for them.
As but one example of how value could be realized through a review, a demerger of the existing US petroleum business (comprising BHP’s US shale and Gulf of Mexico petroleum assets), could unlock US$15 billion in shareholder value, by allowing both core BHP and its petroleum assets to trade at higher valuations.
Bring fresh perspectives onto the BHP board
BHP’s new choice of Chair represents a constructive step toward a better board. But it is only a first step. Investors deserve fresh thinking so that BHP can leave behind its old value-destructive approach.
These directors should have the relevant skills and experience to simplify BHP’s structure, improve its returns, allocate its capital more wisely, and strengthen BHP for the future.
it all up
So what does THINKING SMART mean for BHP shareholders when you add it up?
The proposals outlined above could provide a pathway to unlock significant value for shareholders – up to US$46 billion more: FOOTNOTE 8
A unified BHP, incorporated, headquartered and listed in Australia, creating up to 51% more value, and potentially doubling Australian shareholders’ yield on BHP shares?FOOTNOTE 9
That’s THINKING SMART.
Sign The Petition
Are you a BHP shareholder? Stay informed about the THINK SMART campaign. If you want BHP’s management to THINK SMART and increase the value of your investment, please fill out the information below.
By filling out the information in the petition form, you are consenting to the data being used in connection with the activities of Elliott and/or its advisors in connection with any intended and/or possible changes to the BHP group’s structure and/or management and/or operations, whether proposed by Elliott or not.