How Safe Is BP plc’s 7.3% Dividend Yield?

BP (LSE: BP) is one of the Footsie’s dividend champions. Apart from a brief period after the Gulf of Mexico disaster, BP has maintained its dividend payout to shareholders for nearly three decades, that’s a record few other companies can beat. 

However, as the price of oil has slumped to multi-decade lows, BP’s dividend yield has surged to 7.3%, reflecting the market’s belief that the company will cut its payout to save cash as the price of oil remains depressed. 

But the market isn’t always right, and BP’s figures indicate that the company is unlikely to cut its dividend any time soon.

Robust balance sheet

One of BP’s most attractive qualities is the company’s strong balance sheet. For example, at the end of the first-half of this year, the company reported a cash and short-term investment balance of $33bn. Admittedly, a large chunk of this cash is reserved for paying liabilities connected to the Gulf of Mexico disaster, but such a robust cash balance can’t be overlooked.

What’s more, BP’s net debt came in at $24bn at the end of June and net debt as a percentage of equity was just under 23%. For full-year 2014, BP’s gross income covered debt interest costs ten times over. So BP has plenty of balance sheet flexibility to navigate its way through the current oil market. 

Other figures also suggest that BP’s dividend is safe for the time being. Specifically, during the first half of the year BP’s cash generated from operations amounted to $8.1bn. Higher profits from the company’s trading, refining and marketing arms, offset declining income from oil production assets.

At present, BP’s dividend payout is costing the company approximately $1.7bn a quarter, a total of $3.4bn for the first half of 2015. With this being the case, the figures suggest that BP generated enough cash from its operations during the first six months of the year to cover dividend payments to shareholders two-and-a-half times. 

Of course, I’m excluding capital spending from this rough breakdown of BP’s cash flows.

Nevertheless, BP’s management is preparing for a prolonged period of low oil prices, and they’re cutting capex accordingly. BP currently expects its organic capital expenditure to be below $20bn for 2015, compared to its previous guidance in the range of $24bn to $26bn.

Moreover, the company continues to divest assets that no longer produce a suitable return on investment, freeing up cash for reinvestment into higher return projects. During the first half, BP agreed to sell $7.4bn of assets under its $10bn divestment programme.

Uncertainty ahead 

BP’s dividend may look safe based on current figures, but there’s no telling what the future holds for the company. Indeed, if oil prices remain depressed for an extended period, management may be forced to cut the dividend. That said, if oil prices rebound, BP’s outlook will improve. 

Overall, for the time being at least, BP’s dividend payout looks safe. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.