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Portfolio Update

Dividing to Conquer

By Roger S. Conrad, on Sep. 5, 2014

Investors who own BHP Billiton’s American depositary receipt (ADR), which represents two of the company’s Sydney-listed shares, will receive ADRs for the NewCo and won’t face any tax liabilities related to this transaction.

US-based investors who own BHP Billiton’s ADR must ascertain whether the spin-off will strengthen the parent and whether NewCo will be a worthwhile holding.

Opinions on the proposed transaction and its implication for investors vary considerably; the stock earns 12 buy ratings and 10 neutrals from analysts, while Credit Suisse’s (Zurich: CSGN, NYSE: CS) Paul McTaggert downgraded the name to “Underperform.”

Short interest in BHP Billiton’s ADR has declined to about six days of it average trading volume.

The stock itself has traded all over the map, rallying on Aug. 17 and 18 amid speculation that the spin-off would involve a massive buyback. However, as more details have emerged, the share price has retreated to about $67.

In addition to the disappointment regarding the share repurchase program, weak commodity prices remain a headwind for BHP Billiton.

After the spin-off, the company’s earnings will depend more heavily on iron ore, a commodity that has skidded to its lowest price since 2009 and could decline even further. This backdrop explains why some investors have questioned BHP Billiton’s plan to ramp up its iron ore production in coming years.

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