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BHP Group (LSE: BHP) shares have lost more than 20% of their value since their early 2023 peaks, and it’s tempting to see this as a buying opportunity.
The temptation rises when I look at dividends. After a downturn in commodities prices, forecasts suggest they’ll fall.
But we’re still looking at yields bottoming out at around 5.5% over the next two or three years. And if that’s the worst a mining down cycle brings, then yes, BHP might be a buy.
Full-year results
FY23 results were out on 22 August. And they leave me in a bit of a dilemma. Iron ore production rose by a modest 1%, with copper production up 9%. Metallurgical coal output was flat. And those are the main three commodities that drive the BHP share price.
But in a year when prices fell, total group revenue declined by 17% to $54bn. And underlying EBITDA dropped 31% to $28bn.
Chinese worries
The main takeaway for me from these latest figures is not financial. No, it’s the fact that commodity demand has remained relatively robust in China and India even as developed world economies have slowed substantially. In the near term, China’s trajectory is contingent on the effectiveness of recent policy measures.
Typing ‘China’ in my browser search box, and the first suggestion I see is ‘China economy’. And the headlines it leads to are all about the slowdown.
Share price
It’s also worth looking at the longer-term share price. Now I don’t put much store in share price charts, but BHP’s are still up 30% in the past five years.
Share price cycles like this tend to lag economic cycles. And there are signs the economic cycle could have further to fall before it turns up again.
So what should we investors do when we’re faced with puzzles like this?
Fundamentals
Part of me wants to just ignore all this cyclical stock stuff and just look at fundamental measures. I mean, that’s what long-term investors do, right?
The 2024 outlook suggests a price-to-earnings (P/E) ratio of a bit over 11, which doesn’t look too stretched. And those 5.5% dividend yields look good, as long as that’s about as low as they get.
BHP’s costs are at the low end of the business. And its iron ore and copper production run with healthy margins.
So I’d say there’s a bit of competitive safety advantage there in the event of a longer downturn.
Back to China
But I just can’t ignore China and its weakening economic outlook. China is, after all, BHP’s biggest customer — as it is with a number of mining stocks.
While I try to ignore short-term moves, the commodities cycle can easily be long enough to creep into my long-term investing horizon.
I love billionaire investor Warren Buffett’s suggestion to invest as if the markets were set to close for the next decade. But 10 years might still not be long enough to see this one out.
Should I buy?
So bottom line for me? Well, BHP shares are tempting. And I do rate the company highly in its sector. But I’m going to sit this out and watch, and hope for better future buying prices.
