- Lord Copper
In the Long Run, we are all Dead
On the heels of Anglo’s announcements of intended asset sales come BHP Billiton’s second half 2015 numbers. They show a loss for the period to December 2015 of $5.67 billion. That’s a big number, by any standards, and the simultaneous announcement of an axe taken to the dividend – a cut of nearly 75% – can come as no surprise. The statement goes on to say that the change in dividend policy reflects the board’s view of the outlook for commodity prices. That’s not an unreasonable approach; the criticism made of dividend policy (by a lot of people, including me) is not about reductions when times are bad. Rather, it’s pointed at those companies (some of our most renowned banking names featuring strongly here) where the staff bonus pool can exceed the total dividend payment. So in those circumstances, the risk -takers – the shareholders – would appear to rank in importance behind the already well-salaried employees (and CEOs are no more than employees…). But in general, resource companies like BHP Billiton have been solid dividend payers, in the good times and, until now, maintaining that level of payout as times got tougher.
What BHP said…
So it’s worth reflecting on what they actually said in their statements. Andrew Mackenzie, the CEO, said: “Slower growth in China and the disruption of OPEC have resulted in lower prices than expected.” Jac Nasser, the Chairman, made the following comment: “The changes to the dividend policy announced today reflect the board’s assessment of the outlook for commodities”. What they are saying, then, is that prices are worse than they expected because of the slowdown in China and the actions of OPEC and that they foresee these low prices continuing for some time. Remember my earlier point: up to now, despite weakening markets, they have been able to hold on. It’s as though they are saying that they can’t see their way to holding their breath any more to reach the surface; they have to give in. Further on in the report, they comment that: “In the long term, the copper outlook remains positive as demand is supported by China’s shift towards consumption and the scope for substantial growth in emerging markets.” So it’s all OK, then? Problems nearby, but just hang on and the long term will be fine.
J M Keynes is not my favourite economist, and I suspect that in a battle of the heavyweights the development of the current global economy would probably have Hayek well ahead on points, but he made the classic comment: “in the long run we are all dead.” In fact, it’s worth looking at the context (from 1923’s ‘A Tract on Monetary Reform’); what he wrote in full was: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.” Thus what he wanted to convey was that if all economists can do is tell us that what will happen in the long term, that’s actually not terribly useful. It’s rather like saying everything is cyclical. Yes, it’s interesting, but without the added knowledge of the length of the cycle and which bit of it we are experiencing, it’s of questionable use.
Fine words…but helpful?
So I don’t mean to be overly critical of BHP Billiton here (in fact, I think they and the majority of the resource sector are amongst the better-run companies in the FTSE); I’m just using them as an example. We all do it; we all glibly speak of ‘long-term’ developments and (one of which I’m particularly guilty) of how everything runs in cycles. Fine words, but not too helpful without a definition of the time involved. What BHP Billiton are really saying is that they expected the downturn to be shorter and hoped that they could weather it without major dividend action; now, they really don’t know how long it is going to last, but they know they can’t keep an open-ended payout policy. That’s probably an honest appraisal, but it suggests the pain has some time still to run.