Is BP plc A Super Income Stock?

The last five years have been incredibly tough for shareholders in BP (LSE: BP) (NYSE: BP.US). With the Deepwater Horizon tragedy occurring during the period and BP being forced to sell-off vast swathes of its empire, it is little wonder that shares are up just 1% since the current bull market kicked off in March 2009.

Over the same period, the FTSE 100 has risen by 73%, which puts BP’s performance into perspective. Indeed, with shares having underperformed in recent years, is now a good time to buy BP as an income play? Can it once again be considered a super income stock?

A Great Yield

BP’s current yield of 4.8% certainly makes it appeal as an income stock. It is well ahead of the FTSE 100’s average yield of 3.5% and, crucially, is more than twice as much as inflation and significantly better than a typical high-street savings account.

BPWhere BP really comes into its own as an income stock, though, is with regard to how quickly its dividend is forecast to grow in future years. That’s because BP is expected to increase dividends per share at an annualised rate of 6.3% over the next two years. This is above the FTSE 100 average and means that if shares were to remain at their current levels, BP could be yielding around 5.4% in 2015.

Of course, a high yield is great but even better is a sustainable yield. On this point, BP also impresses because its dividend payout ratio is just under 50%. This means that it pays out less than half of net profit as a dividend, thereby providing the company with sufficient capital to grow the business via reinvestment. It could be argued that a dividend payout ratio of 50% is too low and could be increased. Doing so would boost the yield for shareholders.

Looking Ahead

Trading on a price to earnings (P/E) ratio of 9.4, BP is cheap — especially when compared to the FTSE 100’s P/E of 13.5. In addition, it provides a great yield of 4.8% that is well-covered and has the potential to grow significantly. As a result, BP is a super income stock.

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Peter owns shares in BP.