The BP (LSE: BP) dividend has attracted income-seeking investors for years. And for good reason. With the oil company’s stock near 472p, the forward-looking yield is around 5%. And it’s often been at a similar level in the past.
Yet is the shareholder dividend safe? It may be, but the company does have its issues.
Cash flow
Cash flow has often been strong in the past and the situation may continue. And that’s potentially good news, because it takes cash to pay dividends.
Debt is also a consideration. It’s quite high and has fluctuated over the years. Perhaps that’s unsurprising when we consider that operations are cyclical and influenced by the price of oil and gas. And that’s despite the firm’s fledgling operations in other areas, such as renewables.
Earnings tend to fluctuate for the company. And in lean times, the net debt figure on the balance sheet sometimes rises. However, recently, debt has been falling.
Here’s the company’s recent record:
| Year to December | 2017 | 2018 | 2019 | 2020 | 2021 |
| Operating cash flow per share ($) | 0.955 | 1.14 | 1.26 | 0.601 | 1.17 |
| Capex per share ($) | 0.836 | 0.831 | 75.6 | 0.609 | 0.537 |
| Free cash flow per share ($) | 0.12 | 0.307 | 0.507 | (0.007) | 0.628 |
| Dividend per share ($) | 0.4 | 0.397 | 0.41 | 0.315 | 0.214 |
Cash flow has been volatile. And that’s unsurprising given the pandemic and the wild swings in commodity prices we’ve seen.
Meanwhile, that line in the table for free cash flow is important. Free cash is what’s left over from capital expenditure. And it’s from free cash flow that companies ‘should’ pay dividends to shareholders.
Unsupported dividends
But the chart shows that free cash flow has not always covered BP’s dividend payments. And that strikes me as being an important point that underlines a vulnerability regarding shareholder payments.
So why might company directors pay shareholder dividends when the cash flow statement doesn’t support them? It’s a good question. But it probably comes down to the pressure of expectations.
After all, many pension funds and other institutional investors are likely holding BP shares precisely because of the dividends flowing from the company. And any cut or stoppage in the flow of dividends could cause BP reputational damage – at least, that’s how I imagine company directors might think sometimes.
Meanwhile, the big capex (capital expenditure) figures show how capital intensive the business is. And that adds a layer of risk.
To me, the very best businesses are capital light and prodigious cash generators. And on top of that, they tend to have low levels of debt, or even net cash on the balance sheet.
However, analysts’ forecasts for the BP dividend show robust single- and double-digit percentage increases for the next couple of years. And the stock may prove to be a satisfactory income investment for investors.
However, it’s worth bearing in mind the potential in the operations of the business for game-changing catastrophic failure. It happened in 2010, for example, with the Deepwater Horizon disaster in the Gulf of Mexico.
On balance, I don’t see BP shares as being a particularly safe long-term dividend investment.
