Are you looking for a safe dividend income from shares? Let’s look at oil giant BP (LSE: BP) to see if it can keep up its payments to investors yielding 5%-plus.
One of the things I’ve admired over the years is the firm’s ability to generate torrents of cash flow. It’s certainly what helped the firm survive the prolonged financial fallout from the 2010 Gulf-of-Mexico blowout disaster, but how has it coped lately in the teeth of weak oil prices?
Worrying trends?
Another consideration is the company’s debt load because interest payments on borrowings compete with investor dividends for the incoming cash flow. The recent record looks like this:
|
Year to December |
2014 |
2015 |
2016 |
2017 |
2018 |
|
Operating cash flow per share ($m) |
1.77 |
1.04 |
0.57 |
0.96 |
1.14 |
|
Net borrowings ($m) |
22,762 |
26,560 |
34,772 |
37,519 |
43,109 |
It seems clear that the price of oil has a big effect on BP’s incoming cash flow. As you can see, the dip in the price of oil in 2016 matches the dip in BP’s cash flow in the table. I think such cyclicality is one of the major risk factors facing investors who hold BP for its dividend.
The cash inflow in 2018 was lower than that of 2014, suggesting a downtrend. Meanwhile, the net debt figure has almost doubled over the four-year period. I think both these measures have been moving in the opposite direction from what we would want them to in order to support a gently rising dividend.
A changing beast
BP has been in a state of flux for some time as it divests some assets and buys up others. But with the fourth-quarter update that it released in early February, chief financial officer Brian Gilvary said that operating cash flow excluding changes in working capital was 33% higher for the full year and 17% up on the previous quarter. The figures included a contribution from new assets in the US.
Perhaps the company is well positioned to build up cash flow in the years to come as long as the oil price holds up. However, the dividend has been essentially flat over the last few years and earnings have made zero progress over the period, as you can see from the table:
|
Year to December |
2014 |
2015 |
2016 |
2017 |
2018 |
|
Dividend per share ($) |
0.40 |
0.40 |
0.40 |
0.40 |
0.41 |
|
Normalised earnings per share ($) |
0.69 |
0.75 |
0.52 |
0.36 |
0.65 |
Another factor to consider with BP is the potential for another oil spill. Such a disaster or something similar might happen. It’s an inherently dangerous business, which is one reason why offshore employees tend to be paid well. In the wake of the Macondo disaster around nine years ago, the dividend stopped completely and was rebased down when it did reappear later.
On balance, BP has too many cyclical and other risks for me to be comfortable holding the shares for the dividend income, so I’d avoid the stock right now.