BP (LSE: BP) is currently one of the highest-yielding shares in the FTSE 100 index. Last year, the oil major paid out total dividends of 41 cents per share. At the current share price, that equates to a trailing dividend yield of more than 10%.
Is this high yield sustainable though? I’m not convinced it is. Here, I’ll explain why I think it’s highly likely that BP will cut its dividend in 2020.
BP shares: a dividend cut on the horizon?
BP currently faces two major challenges that could impact its ability to continue to pay its current level of dividends to investors.
First, there’s oil prices, which have crashed in 2020 due to Covid-19. Brent crude prices started the year around the $65 per barrel mark. Today, stand at around $40 per barrel. This is well below the level the oil majors would like.
This decline in oil prices is likely to hit BP’s cash flows and profits hard in the near term. Earlier this week, the FTSE 100 company said it’s expecting to post second-quarter, post-tax, non-cash impairment charges and write-offs of between $13bn and $17.5bn. That’s its biggest writedown since the Macondo oil spill a decade ago. This drop in profitability is likely to have negative implications for the dividend.
On top of this, there are longer-term challenges associated with the shift towards renewable energy. BP is taking the shift seriously. It plans to eliminate the carbon footprint of the oil and gas it produces to ‘net zero’ by 2050. This is an ambitious goal that’s likely to cost the company a significant amount of money. This potentially means less cash will be available for dividends.
Add in the fact that rival Royal Dutch Shell recently slashed its dividend for the first time since World War II (which takes the pressure off BP in terms of the potential market reaction to a dividend cut) and I think a dividend cut in 2020 is highly likely.
Here’s what analysts are saying
It appears that a wide range of analysts agree with me.
Michael Hewson, chief market analyst at CMC Markets, recently said: “Having seen Shell bite the bullet and cut its dividend a few weeks ago, it would appear that BP is likely to have to follow suit, if it wants to reduce its already high debt levels and shore up its balance sheet.”
Similarly, AJ Bell investment director Russ Mould said earlier in the week that he thought that BP’s recent update was “softening shareholders up” for a dividend cut when the company posts its second quarter results at the beginning of August.
Meanwhile, Biraj Borkhataria of RBC Capital Markets recently predicted BP would cut its payout by 40%, stating that it was a case of “when not if,” while Redburn analyst Stuart Joyner said he is expecting BP to cut its dividend by a third.
Be prepared for a dividend cut
In conclusion, if you own BP shares, I think you need to be prepared for a dividend cut in the near future. With oil prices remaining low and the company needing capital in order to shift its focus towards renewable energy, a dividend cut looks highly likely, in my view.
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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. 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.