Thanks to their impressive cash flows, oil stocks such as those on the FTSE 100 index can be a great source of passive income. BP (LSE:BP.), for example, looks like it could be a brilliant buy for dividend, based on its recent share price.
At 471p per share, the energy giant carries the following large dividend yields. As you can see, these figures below also reflect City expectations of solid dividend growth over the short term.
| Year | Dividend per share (f) | Dividend yield | Annual dividend growth |
|---|---|---|---|
| 2024 | 23.76p | 5% | 7.7% |
| 2025 | 25.15p | 5.3% | 5.9% |
Yields for the next two years comfortably beat the FTSE 100’s forward average of 3.8%. So should I buy the business to make a market-beating passive income?
Profits growth
These bright forecasts are supported by predictions of steady earnings growth over the next two years. Bottom-line rises of 18% and 2% are forecast for 2024 and 2025 respectively.
City analysts are upbeat thanks to continued strength in the US economy, the world’s largest consumer of oil. What’s more, with inflation falling sharply, demand-boosting interest cuts from the Federal Reserve (and other central banks) could also help to boost BP’s bottom line.
Trouble coming?
The trouble for investors in oilies like this is that crude prices are firmly on the defensive. Brent values actually dropped for the first time since 2020 last year amid signs of weakening demand and increasing oil stocks.
Analyst Sophie Lund-Yates of Hargreaves Lansdown recently noted that “the overall theme of the year though seems to indicate that heat has come out of the price for now,” though she added “that can change at very short notice.”
A lack of market reaction to more production cuts by OPEC+ countries last year is a troubling indication of the direction of oil prices. Even fresh geopolitical conflicts in the Middle East — traditionally a significant driver of energy values — has failed to move the dial higher.
Balance sheet blues
This is a worrying indicator for BP. That’s even though predicted dividends are covered a healthy 3.2 times and 3.1 times by predicted earnings for 2024 and 2025 respectively.
After all, profits forecasts for energy producers can be left in tatters when the economy cools and profits (and cash flows) sink. And BP is especially vulnerable given the huge debts it has on its balance sheet. Net debt stood at $22.3bn as of September.
The capital-intensive nature of the firm’s operations also creates danger for future dividends. Its capex bill totalled a staggering $11.5bn during the first nine months of 2023.
The verdict
Encouragingly for passive income investors, BP remains determined to shower excess cash on its shareholders. It raised the third-quarter dividend 21% year on year back in October and announced a new $1.5bn share repurchase programme.
But its ability to continue doing this could come under huge pressure during the new year. And as a long-term investor, I’m concerned about how much firepower the firm will have to pay large dividends further out as renewable energy sources take over from fossil fuels.
I’d rather avoid BP shares and buy other FTSE 100 stocks for passive income.
