Could the BHP Group Ltd (ASX: BHP) share price be an income opportunity right now?
The resources giant has been riding high with elevated iron ore prices as well as strong copper prices.
However, the BHP share price has been drifting down a little recently.
Is the BHP share price an income opportunity?
The thing to remember with resources companies is that they’re price takers. BHP has to sell its resources at whatever price its customers are willing to pay.
Most commodities have booms and busts, so the profit and dividends can be quite volatile year to year as well.
For now, BHP is making good profit. It’s actually one of the most diversified resource businesses on the ASX.
Businesses with a focus on a single commodity have to ride the cycle. For example, Rio Tinto Limited (ASX: RIO) generates most of its profit from iron ore. But BHP earns profit from iron ore, copper, oil and coal. Four different resources are less volatile together than just one.
So BHP’s profit is more consistent because there are several different commodity cycles going on within BHP’s business.
As long as you know that the profit and dividend are cyclical, then it won’t come as a shock.
Dividend yield
Knowing that the dividend isn’t going to be this strong forever, it currently has a rolling 12-month fully franked dividend yield of 4.2%.
In the FY21 half-year result, BHP increased its dividend by 55%.
If iron ore prices fall, which many analysts are expecting sooner rather than later, then the profit and divided (and BHP share price) is likely to fall too. But who knows when iron ore prices will decline?
Time to jump on this BHP share price?
The BHP share price has gone up by 50% over the last year. It’s not cheap.
It’s normally a good idea to wait for the lower point of the commodity market before buying. You probably don’t want to be buying at the peak of the commodity cycle, if this is the peak. It’s more likely that the dividend is going to be cut rather than keep growing in the shorter term.
According to the earnings estimates on CommSec, the BHP share price is priced at 15 times the estimated earnings for the 2023 financial year.
