Is BP plc A Safe Dividend Investment?

bpIn recent years, since oil giant BP’s (LSE: BP) (NYSE: BP.US) BP’s 2010 Gulf-of-Mexico blowout disaster, the firm’s story has been all about cash.

It takes spewing plumes of cash to get through the ongoing draw from the disaster and, so far, BP has risen to the challenge, meeting its obligations, and even reinstating its dividend along the way.

Operations deliver

Progress on cash flow continues. Recent first-half results reveal net cash from operations up 72% over the year-ago figure, at $16,108 million. If progress continues in the second half, BP looks set to deliver a cash-flow result that will be well up on last year, and in line with its robust cash-generating record:

Year to December 2009 2010 2011 2012 2013
Net cash from operations ($m) 27,716 13,616 22,154 20,479 21,100

Last year, dividend payments cost BP $5,910 million so, even after other capital expenditure, BP’s everyday cash flow seems well up to the task of financing dividend payments. Here’s the firm’s recent dividend record:

Year to December 2009 2010 2011 2012 2013
Dividend (cents) 56 21 29 34 37

We can see where the dividend stopped for part of the year in 2010 and then rebased down immediately after the oil blowout in the Gulf of Mexico.

At today’s share price of 492p the forward dividend is running at about 5% for 2015 with city analysts predicting that adjusted earnings will cover the payout just over twice that year.

What could go wrong?

Although BP has already met much of the cost of its Gulf-related obligations, at least one large cloud still hangs overhead. The trial to determine the amount of civil penalties BP owes the United States under the Clean Water Act is due to start on 20 January 2015. That and other legal proceedings could yet push BP’s liabilities resulting from the Deepwater Horizon disaster well above the firm’s current estimates.

In Russia, BP reckons the escalating crisis between Russia and the rest of the world over Ukraine could hurt BP’s income from its stake in Russian oil firm Rosneft if sanctions against Russia dig in.

Both of these issues seem to have potential to gather pace and sink BP’s share price, such that capital attrition could wipe out investor gains from dividends. In an extreme outcome, even the dividend itself could suffer.

What now?

BP’s cash flow seems robust, but there are elephants in the room!

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Kevin Godbold has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.