Until 2010, BP (LSE: BP) was one of the FTSE 100’s most reliable dividend-paying stocks. The oil giant was also a favourite of hedge funds, pension funds, and income trusts thanks to its slow and steady nature as well as the company’s desire to achieve the best returns for investors.
Then in 2010, tragedy struck. The Gulf of Mexico disaster forced BP to slash its dividend payout, sell off billions of dollars in assets and spend billions on lawsuits as well as compensation claims.
Although it has since reached an agreement with US authorities over the total amount of compensation to be paid, BP is still paying for the Gulf of Mexico disaster and will be for many years to come. And aside from the obvious value of compensation that BP has paid out to victims of the oil spill, the disaster has also cost BP and shareholders an unquantifiable amount of long-term value.
Loss of value
As part of its drive to free up as much cash as possible following the disaster, BP sold off its world leading solar energy business and put its wind farm business (one of the largest in the US) up for sale as well.
This withdrawal from renewables has hurt BP’s long-term prospects. Moreover, every $1 returned to victims of the Gulf of Mexico disaster is one dollar less BP has to invest in its business. BP is set to pay a record of $54.6bn in claims connected with the catastrophe. Over time, this loss of investment could cost the company hundreds of billions of dollars due to the effects of compounding.
Reinvesting for growth
On the other hand, BP’s larger UK peer Shell (LSE: RDSB) has been able to reinvest almost all of its earnings over the past 10 years, which is great news for the company’s long-term investment prospects.
Indeed, even after acquiring BG Group in February, Shell’s capital spending is the highest among its rivals, exceeding that of US rival ExxonMobil and putting the company in a prime position to benefit if the price of oil returns to historic levels.
At the same time, the group is committed to reducing its debt after buying BG and management is looking to reduce its gearing from around 25% back to a mid-teens level.
Asset sales will be the main lever Shell is going to pull to reduce debt and this should high-grade the company’s portfolio as Shell looks to sell off non-core, low return assets to boost its cash pile. Once again, when the price of oil returns to more sustainable levels, this high grading will ensure that Shell’s profits recover faster.
The bottom line
So overall, if you’re looking for both price and income then Shell could be a better pick than BP. Shell’s shares currently support a dividend yield of 7.5% while BP’s shares yield a slightly more attractive 7.7%.
