Today I am explaining why BP (LSE: BP) (NYSE: BP.US) is an attractive payout pick.
Monster yields on the cards
Oil leviathan BP has continued to suffer badly from wildly-fluctuating earnings in recent years, as a backdrop of rising costs and depressed oil prices has persistently whacked the bottom line. City analysts do not expect BP to witness a vast improvement any time soon, and expect a
further 35% earnings fall in the current year. A 7% recovery is pencilled in for 2015.
Despite these enduring travails, the company has managed to keep dividends moving higher since 2011, and current consensus indicates further positive momentum through to next year at least. Indeed, BP is expected to raise the 2014 payout to 39.3 US cents per share, up 6%, and an additional 5% rise — to 41.4 cents — is chalked in for 2015.
These projections create monstrous yields of 4.8% and 5.1% for 2014 and 2015 correspondingly. Not only do these readouts smash a FTSE 100 forward average of 3.2%, but a respective 3% yield for the complete oil and gas producers sector is also comfortably surpassed.
Chunky cash flows underpin payout picture
Many commentators quite correctly highlight the potential impact of oil market oversupply on BP’s earnings potential, a situation which could have a calamitous effect on dividend growth. Indeed, Bank of America-Merrill Lynch expect WTI crude to average just $99 per barrel this year before falling to $96 in 2015.
Still, projected payments during this period would appear to be well protected by earnings, even taking into account this year’s expected collapse — dividend coverage registers at a healthy 2.1 times prospective earnings through to the end of 2015, above the minimum security benchmark of 2 times.
On top of this, the oil specialist’s ability to chuck up vast amounts of cash — boosted by ongoing asset sales — should fund chunky dividend growth, as well as keep its bubbly buyback programme shuttling along. The business saw operating net cash rise to $16.1bn during January-June from $9.4bn in the corresponding 2013 period, a situation which prompted the firm to raise the quarterly dividend 8% on-year to 9.75 US cents.
I have long voiced concerns of the potential impact of declining oil prices on BP’s dividend profile, combined with the impact of divestments on earnings as well as the final bill for the 2010 Deepwater Horizon catastrophe. Although these issues could stymie payout growth in the long-term, I believe that investors can expect juicy dividend hikes over the next 24 months and potentially beyond.