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BP plc vs Royal Dutch Shell Plc: Which Wins On Income And Growth?

BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) are two of the FTSE 100’s largest companies and dividend champions. 

However, both BP and Shell have different outlooks and if you can only pick one, choosing between the two can be a tough choice. So, which one is the best pick for your portfolio? 

Shrinking to growBP

It’s fair to say that the past few years have been tough for BP but the company is now trying to put these troubles behind it. Unfortunately, claims from the Gulf of Mexico disaster continue to flood in and BP is having to fork out billions to settle these lawsuits. 

Nevertheless, away from the courts, BP’s management has set out a clear-cut plan for growth. 

Essentially, BP shrinking to grow. The company has already made more than $38bn of divestments during the past few years and a further $10bn are planned by 2015. Along with these asset sales, the company brought in a target to increase annualised operating cash flow 50% between 2011 and 2014, which management is confident of achieving. 

To meet this target, BP has over 50 major projects being progressed this year. The majority of these projects are giant offshore fields, which usually have low costs and give the company long-term production clarity.  

Further, BP continues to cut costs and streamline the company’s management structure.

Now, you might think that as BP is aggressively cutting costs and selling off non-core assets, the company’s production would be sliding; this is not the case. Indeed, since the Gulf of Mexico disaster, BP has become the world’s second largest oil producer in terms of output, including the company’s Rosneft stake. The world’s largest oil company in terms of output is ExxonMobil.

royal dutch shellStruggling for growth

Unfortunately, Shell’s growth plans for growth look to be disappointing compared to those of BP. 

Shell has committed itself to $15bn of divestments during the next few years in an attempt to prune its portfolio. Many analysts have questioned whether or not this will be enough.

Additionally, Shell has promised to turn around the fortunes of its North American business, which is losing money, despite the fact that over $80bn of capital is employed in the region — based on 2013 figures. 

Actually, in total, Shell’s assets amount to $352bn at current exchange rates, indicating that nearly 30% of Shell’s assets are achieving a negative return, a terrible return on investment for one of the world’s largest oil and gas companies.

To try and combat its poor North American performance, Shell has cut jobs and packaged its North American business into a stand-alone entity, BP has also used a similar strategy for its US assets. Further, Shell is cutting regional capital spending, slashing jobs and streamlining its management structure. 

The income question

So, when it comes to the question of growth, BP appears to be the clear leader but what about income?

Well, Shell is famous for its hefty dividend yield, which has been in place since the Second World War and currently stands at 4.4%. At present, BP’s dividend yield currently sits at the same level. 

However, BP offers something Shell does not; share repurchases.

Well, that’s not strictly true, Shell is repurchasing stock but only enough to offset the script dividend. On the other hand, BP’s buybacks are designed to return significant amounts of cash to investors.

Indeed, during 2013 BP returned $5.4bn via dividends and $5.4bn through buybacks, effectively doubling the dividend payout.

In sterling terms, this cash return works out as around £6.5bn, or 33p on a per share basis. As an equivalent yield, 33p per share works gives a yield of 6.6% at current prices, or 7.8% if you bought your shares at the beginning of 2013.

The better choice

Thanks to its dividend yield and share repurchases, BP looks to be a better choice than Shell for income and growth.

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Rupert does not own any share mentioned within this article.