Does BP plc Pass My Triple-Yield Test?


Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE’s gains mean that the wider market is no longer cheap, and it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over BP (LSE: BP) (NYSE: BP.US).

The triple yield test

Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my income portfolio, I like to look at three key yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

BP Value
Current share price 475p
Dividend yield 4.9%
Earnings yield 9.8%
Free cash flow yield 14.1%
FTSE 100 average dividend yield 3.0%
FTSE 100 earnings yield 6.0%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. BP’s adjusted earnings yield of 9.8% is much higher than the FTSE average of 6.0%, and reflects BP’s attractively low P/E rating of 10.

BP’s shares also pass my test with flying colours in the income department. A trailing yield of 4.9% is excellent, and BP’s strong free cash flow yield demonstrates its ability to generate surplus cash from operations and divestments.

Buyback heaven

In March 2013, BP announced an $8bn share buyback programme. The firm has repurchased $3.3bn of its shares, so far, and expects the buyback programme to be completed by September this year.

BP’s share count is already more than 3% lower than it was at the end of 2012, and with more than half of the buyback programme still to come, shareholders can expect to see the benefits of further earnings and dividend concentration in BP’s 2014 results.

Is BP a buy?

BP expects to sell a further $10bn of assets before the end of 2015, and plans to use the majority of the proceeds from asset divestments for further shareholder returns, mostly through share buybacks.

Net gearing remains low, at around 15%, and notwithstanding the risk of a $20bn-plus fine when Judge Barbier rules in the firm’s Clean Water Act trial later this year, I think that BP remains a sound investment with good long-term income potential, and deserves a buy rating at less than 500p per share.

BP's dividend is key

I believe that BP's generous dividend is likely to remain safe regardless of the outcome of the firm's Gulf of Mexico trial, but I could be wrong.

In "How To Create Dividends For Life", the Motley Fool's dividend experts describe the 'five golden rules' they use to test the safety of companies' dividends.

If you're a BP shareholder, I'd strongly recommend taking a look yourself, so that you can reach your own decision about the safety of BP's generous 5% prospective yield. This report is completely free -- just click here for your copy.

> Roland does not own shares in BP.