After only about 12 days in the top job, 
BHP Billiton's (BLT) new chief executive Andrew Mackenzie, who took the helm from Marius Kloppers, recently sat down with UBS analysts to discuss a three-pronged approach to increasing free cash flow and, therefore, shareholder returns.
The analysts say Mackenzie's approach involves: (1) pulling the productivity lever to drive lower unit costs; (2) reducing capital expenditure, with volume growth to take a backseat to capital efficiency; and (3) simplifying the portfolio and focusing on the four pillars of iron ore, copper, coal and petroleum in order to drive margins.
And while Mackenzie sees BHP's past strategy as having worked well, he is still looking to sharpen it further, the analysts say. "(Mackenzie) wants shareholders to track his performance and is targeting more value per share," they say.
The analysts expect BHP to achieve improvements in free cash flow, which will in turn lead to debt reduction in the near term. Subsequently, after about 12 months, they expect share buybacks to take priority over an increase in dividends or capital projects.
"Over the next 12 months, we expect proceeds from asset sales and cost outs to lead to a reduction in debt ... at which point we expect share buybacks to take priority over dividends and capital investments," the analysts say.
While BHP's dividend policy may have been the subject of recent debate, they say that Mackenzie reiterated that the company's existing progressive dividend policy has not only worked well historically, but will continue to do so. "At UBS we do not expect any change. Historically, BHP has returned around 50% of underlying earnings through dividends and buybacks," they say.
Morningstar senior analyst of basic materials, energy and utilities, Mark Taylor, also argues that larger returns are on the cards for BHP shareholders, but believes these returns will take the form of a combination of both increased dividends and buybacks.
"CEOs want to see EPS [earnings per share] growth on their resumes. You don't get it when you pay all earnings out as dividends. But you can get it with buybacks if they're appropriately priced."
Taylor says that while "fiscal discipline" by BHP could result in less growth, increased income to shareholders via a higher dividend payout ratio or via buybacks could also effectively generate share price growth. "Capital discipline should be a positive for the commodity supply/demand balance," he wrote in a recent analyst note.
"If the world's largest resource players - BHP Billiton, Rio Tinto (RIO), Vale, Anglo American (AAL) and the newly formed Glencore Xstrata (GLEN) - truly have pricing power, now is the time to exercise it through supply discipline and returning a greater slice of profits to shareholders," he says.
Lower Commodity Prices? Don't Fret!
With a lot of recent discussion in the market focussing on the potential for a softening commodity price environment, Taylor also expresses his belief that the market "frets too much" about this issue.
"While BHP can anticipate headwinds in the form of softening commodity prices from boom-time levels, some relief can be anticipated in cooling construction and development costs, and operating costs," he says.
"Long term, BHP is a low-cost producer, and in a downturn, competitors will be weakened even more so.
"BHP is putting the brakes on capital expenditure and is focused on cutting operating costs and winning efficiencies ... cutting capital expenditure also raises the prospect of increased dividends, which we think would be positively viewed by the market."
Assuming BHP retains its progressive dividend policy, Taylor says shareholders can expect minimum effective fiscal 2013 and 2014 dividend yields of 3.3% and 3.8% on a 50% payout ratio - or potentially higher.
"Kloppers bequeaths his successor, Andrew Mackenzie, a company in good shape. The name of the game is ongoing cost reduction, increased productivity and broader economies of scale," Taylor says.
