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What Dividend Hunters Need To Know About BP plc

Today I am looking at whether BP (LSE: BP) (NYSE: BP.US) is an appealing pick for those seeking chunky dividend income.

Stonking yields on the table

Since the effects of the 2008/2009 financial crisis crushed oil prices, and with it BP’s earnings and dividend performance, the oil giant has taken massive steps in getting its payout policy back on track. Despite industry difficulties continuing to whack profits, the company has lifted the annual payout at a compound annual growth rate of 15.2% since 2010.

BP

Even though fresh earnings pressure appears to be on the horizon — City analysts have pencilled in a further 34% earnings drop in 2014
— BP is anticipated to raise the total payout 8.3% this year to 40.1 US cents. And a 5% earnings recovery in 2015 is predicted to underpin an 5.2% dividend increase to 42.2 cents.

Although expected payout expansions lag those of previous years, projected payments for this year and next still create chunky yields of 4.7% and 5% respectively. Not only do these readings beat a forward average of 3.2% for the FTSE 100, but a corresponding reading of 2.6% for the whole oil and gas producers sector is also put firmly in the shade.

A precarious long-term pick?

On first viewing, income investors should be buoyed by BP’s dividend coverage during the medium term, which stands marginally above the widely-regarded security benchmark of 2 times prospective earnings at 2.1 times through to end-2015.

And BP’s weighty cash reserves also boost investor confidence in near-term payout potential. The oil goliath’s cash pile registered at £27.4bn as of the end of April, up from £22.5bn as of the end of 2013.

With the company’s rolling asset divestment programme also promising to bolster the balance sheet — the company plans to shed another $10bn worth of projects before the end of next year — BP looks set to continue rewarding shareholders through bumper dividends and share buybacks, at least in the next couple of years.

But for the long-term, worsening oversupply in the oil industry looks set to drive crude prices down the sinkhole, a situation which could derail earnings and dividend potential further out. Meanwhile, question marks remain over whether BP’s aggressive asset-shedding scheme could significantly dent the group’s production prospects in coming years.

Meanwhile, the ongoing court case related to the Deepwater Horizon oil spill in 2010 could also significantly hurt earnings when a final legal bill is drawn up. And the impact of sanctions imposed on Rosneft head Igor Sachin by the US has led to concerns that BP — which owns a fifth of the Russian oil firm, and from which it sources around 25% of total output — could be dragged further into the mire should the escalating Ukrainian crisis lead to restrictions on the company itself.  

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Royston does not own shares in BP.