It’s understandable that a number of investors are becoming somewhat uneasy regarding the payment of dividends by resources stocks. After all, the sector has been hit incredibly hard, with a lower oil price making the future seem more uncertain than ever. As such, sentiment in oil majors such as BP (LSE: BP) (NYSE: BP.US), which was once viewed as a relatively stable income play, has deteriorated.
In fact, it could be argued that it has never recovered following the oil spill of 2011, with Russian sanctions and the compensation payments causing BP’s share price to fall by 12% over the last five years while the FTSE 100 has soared by 38% in the same time period.
Financial Standing
Of course, BP remains one of the most financially sound oil companies in the world. For example, it has a very modest debt to equity ratio of 47%. This shows that its balance sheet it not overly leveraged and, in fact, debt levels could be increased significantly so as to allow acquisitions and for BP to take advantage of depressed asset prices at the present time.
Furthermore, BP’s operating cash flow remains extremely healthy, with it averaging £16.5bn per annum during the last three years. And, while capital expenditure requirements have used up the bulk of this cash, BP is investing for its long term future, which should deliver improving profitability and performance in the years ahead.
Dividend Payout
Clearly, the fact that dividend payments on a per share basis exceeded earnings per share last year is a cause for concern for the company’s investors. In fact, BP’s dividends were almost twice net profit in 2014, which was a result of the company’s bottom line falling by 83% as a lower oil price hurt profitability. However, in the current year BP’s dividends are set to equal its net profit, with its bottom line set to rise and, looking ahead to next year, BP’s dividend coverage ratio is due to improve to a very respectable 1.22.
This should give investors in the company a degree of confidence that BP can afford its current level of dividends and, with the company’s CEO, Bob Dudley, recently stating that dividends are a priority, it is likely that their current level will at least be maintained over the medium term.
Looking Ahead
BP currently yields a hugely impressive 5.6%. That’s around 60% higher than the FTSE 100’s yield of 3.5% and makes BP one of the highest yielding stocks on the FTSE 100. Certainly, there are concerns regarding the future price of oil and there is a very real possibility that the oil price could move significantly lower in the short run. However, as things stand, BP’ dividends appear to be relatively stable and investors should be able to benefit from a superb yield over the medium to long term.
And, looking ahead, BP has the financial capability to make acquisitions and this could act as a catalyst for share price growth. Furthermore, with BP having a price to book (P/B) ratio of just 1.1, there is substantial upside potential, which makes BP a top notch value as well as income stock.
