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Some investors attempt to foresee every risk that could negatively affect their portfolio’s performance. While this may sound logical, since it might allow them to sell shares before any decline and buy them back again later at a much lower price, in practice it is impossible to predict future events accurately.
For example, there is little point in investors trying to work out how geopolitical events, notably conflict in the Middle East and Eastern Europe, will develop. Such events could have a marked effect on the global economy and stock market or a minimal impact on share prices, or their effect could be somewhere in between. Nobody can say for sure which outcome will be the actual one.
Therefore, in Questor’s view, investors must focus on buying high-quality stocks at fair prices. They should then hold them through the stock market’s ups and downs, rather than trying to time the market. In doing so, history suggests they are extremely likely to generate relatively high returns in the long run.
With that viewpoint in mind, this column reiterates its bullish stance on the mining company BHP. We originally tipped it in January last year and its shares have fallen by 3pc since then.
However, the company has paid $4.95 a share in dividends following our recommendation, which amounts to about £4.09 at today’s exchange rate and equates to 17pc of our initial purchase price.
In addition, we advised readers to sell their new holding in Woodside in August last year following its merger with BHP’s petroleum business. This amounts to a further 16pc in profits when measured against BHP’s purchase price.
Clearly, the company’s financial performance is being negatively affected by a tough period for the world economy. Rising interest rates are acting as a drag on global growth and the company’s latest full-year results reported a 44pc decline in earnings per share.
This was largely due to lower commodity prices prompted by weaker demand, as well as the impact of high inflation on costs. The full-year dividend was slashed by 48pc, at which level it was covered 1.6 times by earnings, although the stock still has a very appealing yield of 6.1pc and substantial dividend growth potential.
Indeed, while BHP may continue to experience difficult conditions in the short run, they will ultimately improve. The cycle of rising interest rates amid high inflation is drawing to a close and the company is in a strong position to capitalise on the next period of more dovish monetary policy and lower inflation.
A key reason for this is BHP’s continued focus on commodities likely to be in high demand over the coming years. Copper, nickel and iron ore are integral to the world’s unrelenting push for net zero, while potash should become increasingly important as a growing world population places additional demands on agricultural productivity.
With limited supply, it would be wholly unsurprising for the prices of such commodities to rise significantly from current levels.
The company’s latest update, released last week, showed it was on track to meet full-year production and cost guidance. It also announced the sale of two coal mines for a total of up to $4.1bn.
BHP intends to use the proceeds to reduce debt, although it retains a solid balance sheet even during a relatively challenging period for the world economy.
Net gearing, for example, stands at just 23pc, while net interest costs were covered 15 times by operating profits in the 2023 financial year despite the slump in profits.
Alongside the company’s diverse range of operations and locations, this suggests it is well placed to overcome short-term risks to deliver high returns in the long run.
Trading at 10.5 times earnings, BHP remains grossly undervalued in view of its financial standing, the quality of its assets and its long-term growth potential.
While geopolitical risks and other unknowns could derail its share price at any time, ultimately it is a high-quality company that trades at an attractive price.
While those risks cannot be accurately quantified or foreseen, the stock remains a highly worthwhile purchase.
Questor says: buy
Ticker: BHP
Share price at close: £23.02
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