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One Reason Why I Would Buy BP plc Today

Today I am looking at why I consider BP (LSE: BP) (NYSE: BP.US) to be a tremendous near-term payout prospect.

A first-class income pick

Even though a backdrop of rising supply and insipid demand growth continues to dictate the oil price outlook, oil leviathan BP remains a popular pick for income investors. The company has lifted the annual payout during each of the past three years, even as earnings have continued to fluctuate, and BP has increased the dividend at a terrific compound annual growth rate of 21% since 2010.

Even though the overhanging effects of the 2008 banking crisis have caused the bottom line to shake wildly in recent years, BP’s ability to throw up plenty of cash has enabled it to keep rewarding shareholders with bumper handouts.

BP’s cash and cash equivalents rose from $22.5bn at the end of last year to $27.4bn at the end of April. And the oil firm’s plans to shed BPnon-core assets to boost capital discipline and develop only the most lucrative assets should keep cash reserves rolling higher during the medium term at least.

Indeed, City analysts expect the firm’s chunky cash pile to facilitate further year-on-year payout improvements, and anticipate an 8.4% rise this year alone to 40.1 US cents per share. An additional inflation-beating 5.2% advance, to 42.2 cents, is pencilled in for 2015.

Such projections generate significant yields of 4.6% and 4.8% respectively, figures which not only outstrip the 3.3% FTSE 100 average but also decimate a corresponding yield of 2.4% for the entire oil and gas producers sector.

As well, BP’s terrific cash position allows it to embark on an extensive share repurchase programme — the oil play announced in March last year plans to buy back $8bn worth of shares. The move was funded by the company’s massive divestment programme that had generated up to $38bn by the time of the announcement.

Investors should be aware that a number of factors could affect the firm’s ability to keep dividends steaming higher further out, from enduring oil price weakness through to the implications of aggressive streamlining on BP’s long-term growth prospects. Still, in my opinion BP is in great shape to continue delivering attractive shareholder rewards over the next couple of years, while an improving global economy could spark a sharp turnaround black gold forecasts for future years.

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Royston does not own shares in BP.