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

The world's biggest miner nevertheless joined it peers in sounding a warning over escalating costs and disappointed some investors by deciding against a share buyback after the result, which also produced Australia's largest ever corporate annual profit of $21.7 billion and $30.1 billion of operating cashflow.

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.

BHP said it prioritized operational growth, maintaining balance sheet strength, growing its dividend and only then did the focus shift to returning surplus cash through buybacks.

We see buybacks really as the deployment of surplus capital after those other priorities have been completed, Chief Executive Marius Kloppers said.

The miner's London shares were up 0.8 percent to 1,905 pence at 0925, marginally underperforming the broader mining sector, 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, gives us a favorable outlook, Kloppers told reporters.


BHP echoed rival miners including Rio Tinto and Anglo American , who have warned on escalating operating and capital costs. BHP said rising costs for labor and equipment cut earnings by $1.2 billion in the year to June.

Its biggest hit came from the weakness of the U.S. dollar against producer country currencies and inflation, which took a $3.2 billion bite out of operating profit through the year, but BHP said it had no plan to begin hedging currency movements.

The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course, Kloppers said.

The company 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 in April, 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.

It expects to spend around $20 billion in the 2012 financial year, mostly on growth.

Income from iron ore, its biggest division, jumped a forecast-beating 122 percent to $13.3 billion, while earnings for base metals soared 47 percent and petroleum earnings grew 38 percent, thanks to rising prices.

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.

(Editing by Ed Davies)