BHP Billiton must make a significant cut to its dividend later this month and not be tempted into a token "tweak", Standard & Poor's says.
Despite warning BHP on Tuesday that it could face a second credit rating downgrade this month if it maintains its progressive dividend policy, S&P has not specified the size of the dividend cut it would like to see.
Speaking on Wednesday, S&P analyst May Zhong said a small "tweak" to the dividend would not be enough to avoid another downgrade.
"I can only give you directional guidance rather than a specific number, we will really have to look at a number of factors, and given the very weak commodity price environment a small tweak to their dividend won't have a material impact on their credit metrics," she said.
Ms Zhong stressed that the quantum of the cuts to dividends and capital spending were not the only factors in the downgrade decision, with BHP's "progressive" dividend philosophy also a problem in a depressed market.
'It is not just about the quantum of the reduction, it is also about the flexibility of their policies. This is a company operating in a volatile and cyclical industry. Hence, what we're trying to understand is the company's financial flexibility, such as its ability to conserve cash, during an industry downturn," she said.
"At the moment, their existing financial policy is constraining their financial flexibility at a time when their cash flows are pressured by lower commodity prices."
The dividend to be paid at BHP's half-year results on February 23 would likely have been $US62¢ a share if BHP were to stick with the progressive policy, which guarantees that dividends will never be lower than the previous year.
But with BHP's top brass determined to avoid a downgrade from an A credit rating to an A- rating, the dividend appears likely to be smaller.
Most analysts expect the dividend to at least halve, with some predicting it will more than halve.
Anticipating the dividend cut, some yield focused investors have already sold their holdings in BHP shares.
A regional dividend fund run by Eastspring Investments exited the last of its 7 million shares late in 2015, according to Bloomberg data.
BHP's Australian stock has fallen by 6.5 per cent in the two trading sessions since S&P announced it was downgrading the miner and warned of a second possible downgrade.
The stock closed 65¢ lower at $14.27 on Wednesday to once again be testing 10-year lows.
S&P's action this week could yet be followed by rival ratings agency Moody's, which has been considering downgrading BHP's credit rating since it put the company on review on December 18.
Moody's said in December that the review would focus on "the potentially very significant counter-measures" that BHP was able to deploy to protect its credit metrics, and its willingness to take those measures.
"Specifically Moody's will be reviewing the company's ability to further reduce operating costs and capital expenditures, as well as its ability and willingness to reduce its ongoing dividends," said Moody's analyst Matthew Moore in December.
Despite also placing Rio Tinto on negative watch this week, S&P did not indicate concern about that company's progressive dividend policy.
Ms Zhong said the slightly different treatment of the two miners' dividend policies was due to the fact that Rio was already on a lower credit rating (A-) than BHP, and therefore was not judged on the same high standards as BHP.
Rio will announce its full year profit and dividend on February 11, and Citi analyst Clarke Wilkins said he did not think Rio's dividend was at risk of being cut.
"While we have halved BHP's [expected] dividend due to concerns over BHP's balance sheet we think that Rio still has more levers to pull and at this stage do not see a significant risk to the forecast dividend of US$2.28 per share," he said in a note to clients.
S&P reaffirmed Fortescue Metals Group's BB credit rating on Wednesday, and kept the iron ore miner's outlook on negative.