For many years, BP (LSE:BP) has been a dividend investor favourite.
Before 2020, BP hadn’t cut its dividend for around a decade. The company’s dividend yield was also pretty sizeable for many quarters. However, management cut the dividend by 50% this year, to 5.25 cents per share, because of the Covid-19 crisis.
Here’s what I think is next for BP’s dividend.
Demand recovery?
The long term outlook for oil and gas is uncertain at best. But many analysts are bullish on leading energy companies for the next few years, thank to the potential economic recovery.
JP Morgan analyst Christyan Malek writes, “While oil demand’s rebound led by new vaccines is likely to be ‘bumpy’ owing to varying degrees of penetration rates in emerging markets, out commodities oil outlook models global consumption almost back to pre-2019 levels in 1H22”.
In terms of vaccine candidates for Covid-19, there has been even more good news. According to the UAE, interim data indicates Sinopharm’s vaccine candidate efficacy is around 86% and there were no serious safety concerns. Also, Sinopharm’s vaccine doesn’t have the challenge of needing to be stored at very low temperatures, Pfizer’s or Moderna’s. However, it should be noted that more data needs to be released to get a full picture of Sinopharm’s vaccine. Some critical details have not yet been released.
Given the Sinopharm news, there is even more hope of a stronger emerging markets recovery. If emerging markets rebound faster economically, I reckon demand for oil could rebound quite strongly too.
BP earnings and projections
Thanks to a projected recovery in demand, analysts expect earnings per share of $1.50 for BP’s 2021 fiscal year. If the company manages that, it will have more than enough to cover its current annual dividend level and even to raise it, if management wishes. I don’t think they will, however, at least not substantially. Many dividend investors prize dividend consistency even more than high short-term payouts.
To me, the easiest way to build a consistent dividend history is to start with a lower payout ratio and to slowly raise the dividend. I reckon that’s exactly what management will do for the next few years at least.
Also management has also given indications of plans to use earnings for other purposes other than the dividend. Specifically, BP management has committed to use a minimum of 60% of excess free cash to buy back stock “once BP’s balance sheet has been deleveraged and subject to maintaining a strong investment grade credit rating”.
The company will also need money for its green energy transition. In the long run, BP faces a serious headwind for its oil and gas business. Electric vehicles (EVs) don’t use oil at all and EV adoption has skyrocketed recently. Given the current increasing investment in the sector, EV adoption will increase even more in the future.
For long-term investors, I think BP’s success in its green energy transition matters more than short-term dividend payments. Given that I’m positive about BP management’s executional abilities, I’d buy and hold BP shares for the long term.
