Demand from China and India Could Reap Billions for this Company

The trend toward increased worldwide industrialization is undeniable.

The growth of China and other emerging markets has exponentially and permanently increased industrial production across the globe. In the past decade, world trade has exploded to a level far beyond what the world has ever known.

The global exchange of goods increased nearly +80% between 2005 and 2008, according to the World Trade Organization. That number plummeted by about a third in the darkest days of the financial crisis.

But things are turning around. The International Monetary Fund recently forecast that growth in worldwide output, which was negative in 2009, will strongly rebound to +3.9% in 2010 and +4.3% in 2011. Leading this rebound: China, where gross domestic product is expected to grow by a sizzling +9% per year for the next five years.

This growth is good news for a company that sells raw materials for industrial production. BHP Billiton, Ltd (NYSE: BHP) is the world’s largest publicly traded mining conglomerate (and one of our “Top 10 Stocks for 2010”). The Australian company sells a diversified array of natural resources including aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium and silver.

How has rising worldwide industrial production during the past ten years affected this stock? BHP returned an amazing average annual return of more than +23% per year during the past 10 years. The S&P 500 results were negative in the same period.

Earnings at BHP proved resilient in the recession of 2009. As a result of massive stimulus spending in China, China and other Asian economies recovered strongly in the second half of 2009 and buoyed demand for industrial commodities. For the full-year 2009, lower prices in iron ore and coal were largely offset by higher copper and nickel prices.

Reduced commodity demand in the first half of fiscal 2009, ended Dec. 31, caused revenues at BHP to fall -17.5% from the same period in 2008, to $24.6 billion. Net profit excluding extraordinary items, however, fell just -7% for the period, to $5.7 billion, and beat expectations. Analysts had forecast profit of $5.1 billion.

A -7% lower profit for a company in a highly cyclical industry in one of the worst economic downturns in generations is a solid performance. As a result of resilience and improving commodity prices in 2009, BHP stock posted a stellar +82% return for the year. Its prospects going forward are strong.

BHP’s guidance as of Dec. 31 was cautiously optimistic. Growth in China and India will continue to buoy demand for raw materials. The long term looks great. The question is the near term.

But given that the developed world depleted its inventories of raw materials during the recession, demand should improve over the next year as companies begin to feel more certain about the future and reorder supplies.

BHP pays dividends twice per year and upped the last dividend from $0.82 to $0.84 for a yearly payout of $1.68 per American ADS share, or a 2.2% yield. The dividend is relatively small as the company has been preserving cash in the recent recession. As a result, BHP has a phenomenal balance sheet. Net debt as of Dec. 31 was the lowest among its peers, as total debt of $16 billion is just 36% of $44 billion in equity capital, and the company had $8 billion in cash.

To meet growing demand and increase future earnings, BHP invested $15 billion in expansions during the past 18 months and plans another $22 billion in expansions in the next 18 months. The expansions are largely low risk development of existing long-life assets that have a high and predictable pay-off.

BHP is one of the world’s biggest suppliers of industrial raw materials in a world with ever-growing demand. Long-term prospects as well as short-term prospects look excellent. But, BHP also offers something else to American investors. As the company earns most of its revenues and pays dividends in foreign currencies, BHP offers diversification and protection from a falling dollar, which many expect. The company also deals in commodities that are a proven hedge against inflation.

All the stars are aligned to make BHP an excellent holding in the near term as well as the next decade.

P.S. BHP is one of our “Top 10 Stocks for 2010.” Click here for the rest of the lineup.