Energy is one of the few commodities that is sure to keep on making handsome profits, isn’t it? Well, Centrica provided a shock to dividend investors last week when it reported a 35% fall in adjusted operating profit and slashed its dividend by 30%. Those who thought that utilities dividends only ever kept going up were reminded that there’s no sure thing in investing.
The others in the sector will be under suspicion now, with confidence perhaps a little dented, so where are we to look for safe income from energy now?
Cash from oil
I reckon the FTSE 100’s oil giants, BP (LSE: BP)(NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US) are offering some of the safest dividends around just now. But what about the damage caused by low oil prices, you might protest! There’s certainly pressure, with BP boss Bob Dudley saying that low oil could be with us for two or three years, but it should be easily manageable by these two — and the price of a barrel of the black stuff is already back up around $60 now and looks like it’s past the bottom.
Earnings drops
BP’s earnings are still depressed, and it faces restructuring costs as it mothballs some of its more expensive production capacity, but the City’s analysts are still expecting a 75% rebound in EPS in 2015. The forecast dividend yield of 5.7% on today’s 445p share price is not expected to be covered by earnings, but cover should resume in 2016. And after fighting hard to get its dividend back up to a healthy amount after the Gulf disaster, BP is going to be very keen to keep the annual cash going even if that means depleting its coffers in the short term.
There’s an EPS fall predicted for Shell too this year, but again that’s expected to reverse in 2016. There’s a forecast dividend yield of 5.5% suggested for 2015, on a share price of 2,193p, and that will still be covered by earnings even as EPS falls — cover is estimated at 1.1 times, recovering to 1.4 times in 2016.
Shell is also going to want to keep its dividend going, even though there are only small rises forecast for the next two year-ends, and I see very little chance of a cut now.
Both safe?
Of the two, I think Shell’s dividend looks the safer. But even if BP were forced to trim its dividend a little, it would be almost sure to bounce back strongly again — and I’d rate these two as amongst the safest long-term dividends out there.
