Yesterday, I wrote about the collapse of FTSE 100 dividends this year. They almost halved, falling 45% in the biggest hit to UK dividends in generations. I also revealed the five FTSE 100 giants responsible for more than a third (36%) of all dividends paid by UK-listed companies.
Another FTSE 100 dividend cut
Now for more bad news for income-seeking investors. Today, the FTSE 100’s second-biggest dividend payer, oil supermajor BP (LSE: BP) announced that it is halving its quarterly dividend. In February, BP actually raised its dividend (paid in March) as the coronavirus crisis gathered pace.
BP’s last four quarterly dividends were 10.25 cents, 10.25c, 10.5c (up 2.4%) and 10.5c, for a total of 41.5c (31.83p). With BP’s share price below 300p since late July, this equated to a double-digit dividend yield for its shares. Clearly, something had to give: either the dividend would fall, or BP’s share price would soar. Today, both happened.
BP shares leap nearly 7%
As I write, BP shares trade around 300p, up 19p (6.8%) this morning. I imagine that this relief rally was due to the dividend being cut by ‘only’ 50%. After all, several FTSE 100 mega-caps have cut deeper or even cancelled their dividends entirely.
The thing is, today’s near-7% rise is a drop in the ocean for BP shareholders. Thanks to Covid-19 and a lower oil price, the FTSE 100 giant’s shares are down 43% over the past 12 months. Ouch.
At their 2019/20 peak, BP shares topped out at over 532p, heading for double today’s price. Then again, during the depths of this year’s market meltdown, BP hit a low of 223p on 19 March. Today, BP shares are actually 35% above their 52-week low. That’s a great gain for those who bought this FTSE 100 share at a bargain price.
This FTSE 100 mega-cap lost billions
Oil companies around the globe have been reporting colossal losses this month, and BP is no exception. Using its preferred measure, known as ‘underlying replacement cost losses’, BP lost $6.7bn in the second quarter. A year ago, this figure was $2.8bn, so BP has reported a $9.5bn downturn.
As for the FTSE 100’s mega-cap’s reported loss, this came in at a whopping $16.8bn. This is BP’s biggest loss since the incredible sums it set aside in response to the Deepwater Horizon disaster of 2010.
I think BP’s dividend makes it a buy
Back in 2010, BP’s Gulf of Mexico spill left it facing an existential crisis. For a time, it seemed possible that the FTSE 100 colossus really could collapse. Hence, BP’s share price dived below £3, only to soar above £5 as fears over its survival receded.
Now for three bits of good news. First, BP has had a new boss since February, chief executive Bernard Looney, whose very reputation depends on BP’s medium-term recovery.
Second, BP aims to strengthen its finances by cutting capital spending by $3bn and costs by $2.5bn a year. It has halted some development projects and raised billions from bonds sales and new credit lines. The FTSE 100 giant also plans to raise $25bn from selling various operations by 2025. What’s more, low-carbon capital spending will rise tenfold from $500m to $5bn a year.
Third, and perhaps most importantly, I don’t see BP cutting its dividend from here. Having rebased it to 21c (16.11p), I imagine the FTSE 100 firm will gently raise it over time.
Hence, with BP shares trading on a forward dividend yield of nearly 5.4%, I’d buy and hold this FTSE 100 share for income today.
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Cliffdarcy has no position in any of the shares mentioned. 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.