The BP (LSE:BP.) share price has been choppy in recent months. But the FTSE 100 oilie remains basically unchanged from levels recorded at the start of 2023. Based on current dividend forecasts this means it offers dividend yields above the UK blue-chip average.
The firm carries a 4.6% dividend yield for this year. This beats the 3.8% average of FTSE shares by a healthy margin. And for 2024 the yield marches to 4.8%.
But how realistic are these dividend forecasts? And should I buy BP shares for my portfolio today?
Looks good on paper
BP raised the full-year dividend to 24 US cents per share in 2022. City analysts expect shareholder rewards to keep increasing as well, to 27 cents this year and to 28 cents in 2024.
At first glance the oil major looks in good shape to meet these dividend forecasts. Predicted payouts are covered 3.2 times to 4.1 times by anticipated earnings during the next two years.
A mixed picture
In addition to this, BP’s terrific cash generation gives it extra scope to pay big dividends over the short-to-medium term. The business recorded surplus cash of $2.3bn during the first quarter.
The company’s commitment to share buybacks provides extra evidence of its financial robustness. Earlier this month it announced plans to repurchase another $1.75bn worth of shares during quarter two.
Having said that, I do find the amount of debt on the books concerning. If oil prices sink, investors could have to stomach a sharp change in the firm’s capital returns strategy.
Net debt clocked in at $21.2bn as of March. And so BP’s net-debt-to-EBITDA ratio stood at an uncomfortably high 4.3 times. Any reading above 3 should set alarm bells ringing in investors’ minds.
Uncertain outlook
As I say, the dividends BP pays out will be determined by the strength of oil prices. Unfortunately the outlook here for the short-to-medium term is unclear.
On the one hand, the ongoing war in Ukraine should support crude oil values. So should the determination of OPEC+ countries to curb supply to boost prices.
But demand could fall sharply if the weak economic landscape is worsened by sustained interest rate rises. A raft of disappointing datasets from China this month suggests that a storm could be building. In this scenario BP could choose to sacrifice big dividends over the next two years to keep its debts in check.
I’m avoiding the shares
On balance I believe that there are better dividend stocks for me to buy for short-term income. But this isn’t the chief reason why I’m avoiding BP shares today.
As someone who invests for the long term I’m concerned about two things — the future for Big Oil as countries strive for net zero, and the firm’s underwhelming attempts to embrace renewables and alternative fuel sources.
In fact the FTSE business has revised plans so that it remains dependent upon oil for longer. It now intends to reduce oil production by 25% between 2019 and 2030, down from a prior target of 40%.
This is a big risk in my opinion as the world steadily weans itself off fossil fuels. And as an investor it’s a gamble I’m not prepared to take.
