Should you buy BP for its dividend after full-year results?

BP plc (LON: BP) announced FY2017 results today. Is the stock a ‘buy’ for its 6% yield?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE: BP) and Royal Dutch Shell are two of the most popular dividend stocks in the FTSE 100. Last week, Shell reported its full-year earnings and confirmed that it will be paying another big dividend for the year. Today, it’s BP’s turn to report. So let’s take a look at the numbers. Is BP worth buying for its dividend with the oil price rising?

Full-year results

Today’s numbers are a vast improvement on last year’s figures. The oil major reported Q4 underlying replacement cost profit (its definition of net income) of $2.1bn, beating analysts’ estimates of $1.9bn. For the full year, the figure was $6.2bn, up from $2.6bn in FY2016. Full-year production increased to 2.5m barrels per day, a 12% increase on last year.

Chief Executive Bob Dudley was extremely upbeat about the results, commenting: “2017 was one of the strongest years in BP’s recent history. We enter the second year of our five-year plan with real momentum, increasingly confident that we can continue to deliver growth.

Steady dividend

Turning to the dividend, BP held its Q4 payout at 10 cents per share, taking the full-year payout to 40 cents per share. At the current share price, that’s a yield of a high 6%. Is that dividend sustainable?

Looking ahead to FY2018, the current consensus dividend estimate is 39 cents per share. That suggests some brokers believe the oil giant will cut its dividend this year. Is that a possibility?

Strong cash flow

Personally, barring another oil price collapse, I believe the chances of BP cutting its FY2018 dividend are very low.

Sure, dividend coverage still looks worryingly thin. BP generated underlying replacement cost profit of just 31.3 cents per ordinary share, resulting in a low coverage ratio of just 0.8 for FY2017.

However, with the oil price having rebounded significantly from its 2016 lows, cashflow is now sufficient to cover the dividend. Operating cashflow (excluding Gulf of Mexico payments) was $24.1bn for the year, up from $17.6bn in FY2016. This level of operating cashflow exceeded organic capital expenditure, cash dividend payments to BP shareholders and share buybacks by $1.1bn.

Break-even price

Furthermore, BP has advised that its current break-even oil price – the price needed to cover capital expenditures and dividends – is around $50 per barrel. So with the price of Brent Crude in the high $60s right now, BP is sitting comfortably. Having said that, the company is looking to drive its break-even price lower, to around $35-$40, to allow more margin for error.

With the oil price back up near $70 per barrel, I can see the appeal in owning BP shares for the big dividend yield right now. The stock is far from what I would consider to be the perfect dividend stock, as dividend coverage is low, and we may not see any dividend growth for a while. However, in the current low-interest-rate environment, in which savings accounts are only paying 1%, a 6% dividend yield does look appealing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »