BHP Billiton delivered a record second-half profit driven largely by soaring prices for iron ore, allowing it to award investors a big hike in dividends on top of its hefty expansion plans.

The world's biggest miner, however, sounded a warning over rising costs and disappointed some investors who had hoped it would undertake another small buyback after achieving Australia's biggest ever annual profit of $21.7 billion.

It's a very solid and commendable result but it's not enough in terms of the surprise factor to catapult people to go and buy the stock on the back of it, said Tim Schroeders, portfolio manager at Pengana Capital.

Investors had been divided over whether to expect another buyback following BHP's recent $12.1 billion bid for U.S. shale gas producer Petrohawk Energy, its biggest successful deal since BHP took over Billiton Plc.

We weren't expecting any capital management initiatives just now given the Petrohawk acquisition but with their cash generation, low debt level and commodities boom, we will focus on it in the next 12 months, said Rohan Walsh, investment manager at Karara Capital.

The miner's shares edged up 0.4 percent to 1,898 pence in early trade in London, after ending flat in Australian trade.

BHP, the last of the major miners to report results, was cautious on the near-term outlook for commodity prices, expecting weak growth in Europe and the United States.

But it continued to see a strong outlook longer term, underpinned by rapidly growing developing countries.

This coupled with shortages of labor and equipment on the supply side, which continue to constrain the industry's ability to bring on new production, give us a favorable outlook, Chief Executive Marius Kloppers told reporters.

COST PRESSURES

BHP joined its peers in warning about escalating costs, saying rising costs for labor and equipment cut earnings by $1.2 billion in the year to June.

In the current environment, tight labor and raw material markets are presenting a challenge for all operators, and BHP Billiton is not immune from that trend, the company said.

It raised its dividend by 22 percent, which it said reflected its confidence in the long term outlook for our core commodity markets, after completing a $10 billion share buyback earlier than planned.

Kloppers said the company would review its plan to spend $80 billion over five years on development projects following its takeover of Petrohawk, as it expects to allocate $5 billion a year on developing Petrohawk's shale gas resources.

Soaring prices for iron ore, copper and oil boosted attributable profit before exceptional items to $10.98 billion for the six months to June from $6.77 billion a year ago, missing an average forecast of $11.7 billion, according to Thomson Reuters I/B/E/S.

Earnings from iron ore, its biggest division, jumped 122 percent to $13.3 billion, while earnings for base metals soared 47 percent and petroleum earnings grew 38 percent.

It said inflation and the falling U.S. dollar cut underlying earnings by $3.2 billion, beyond the impact of rising labor and equipment costs.

BHP's shares have fallen 16 percent so far this year on worries about global growth, underperforming the broader market's <.AXJO> 14 percent drop.

(Editing by Ed Davies)

Australia