The departure of top bosses seems to be the order of the day right now, and just a couple of days since we heard of the coming exit of Tesco‘s Dave Lewis comes the news that Bob Dudley of BP (LSE: BP) is set to follow in his footsteps.
Both chief executives have steered their firms though crisis periods and each has seen their company come through successfully into new health.
Dudley, who will retire on 31 March 2020, has been with BP for 40 years and in the top job for the past 10, and in that time he’s seen the company through the Deepwater Horizon disaster and the oil price crash.
During the latter crisis, he kept a famously cool head when so many were losing theirs, predicting up front that low oil prices were set to be with us for a number of years — and assuring us that BP was in healthy long-term shape.
Throughout that period, BP kept its dividend unchanged, resulting in yields averaging better than 6%. That was even during the few years when the dividend wasn’t close to being covered by earnings, but it shows why I think BP is such a good investment for pensioners and others seeking reliable income.
We do see companies from time to time paying dividends in excess of earnings, but for that to be sustainable it must be based on the firm’s ability to generate sufficient cash over the long term. For an example of excess dividends that couldn’t be maintained, we only need to look at Vodafone, which was consistently paying dividends way in excess of earnings but without, as far as I could see at least, a joined-up long-term strategy to sustain them.
That finally came to an end in May when the telecoms giant slashed the dividend by 40%, though I’m still not convinced there’s sufficient cover for even the reduced amount.
But back to BP, I don’t think there was ever a realistic chance that its dividend would be cut, and that’s why it (along with Royal Dutch Shell) is near the top of my pension buy list — and I intend to invest significantly in one of those two within the next few months.
BP’s replacement for Bob Dudley comes as no surprise. Bernard Looney will take over as the new chief executive, from his current position as head of exploration and production. A long-time company insider, Looney has long been seen as front runner for the top spot, and to me his appointment signals a continuation of the company’s conservative management style concentrating on the long-term future.
As to what to do about BP’s shares, I think the answer is obvious. With a 10% EPS rise forecast for the full year, we’re looking at a P/E of a little over 12 — and that would drop to under 11 if the additional 15% earnings hike on the cards for 2020 comes to pass. Dividend are expected to yield around 6.5% too, and I rate that as one of the best on the FTSE 100.
Shell shares are on a similar valuation, so my decision over which to buy could be tricky — I might just split the money and have some of both.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.