The ‘Net Zero’ thing put me off BP (LSE: BP) just as it did with many investors. I mean, who wants to invest in something that’s going out of fashion? Well, since a low point last November, the BP share price has climbed 65%. Those who went against the crowds have already done nicely.
Dividends surely won’t get back to old levels any time soon, though. And we can no longer rely on gushing profits flowing from the unrestricted pursuit of ever-increasing oil volumes. But then, the share price has been reset too. And when a company undergoes fundamental change, surely it’s time to take a fresh view.
In fact, 2020 was a year of major change. When BP released full-year results in February 2021, chief executive Bernard Looney described it as “a pivotal year for the company.”
Dividends are key
Re-examining BP with that in mind, I am starting to like what I see again. I would always have bought BP for its dividend in the past, and that has now been severely pruned. Along with BP’s big Net Zero announcement in August 2020, the dividend was rebased to a hopefully sustainable 5.25 cents per share per quarter.
That would provide an annual dividend of 21 cents per share, or approximately 15.4p at current exchange rates. On the latest BP share price, that’s a yield of 4.9%. And that is not too far behind BP’s long-term dividends of old. I really wouldn’t mind some of that. In fact, the Q2 payment for 2021 has since been upped to 5.46c, or 3.95p. So we’re already seeing a progressive dividend.
Oil prices
At the moment, oil prices are reasonably strong again, and that has helped BP to a first half surplus cash flow. The company has already commenced a share buyback of $1.4bn. And at Q2 time, Looney said: “On average at around $60 per barrel, we expect to be able to deliver buybacks of around $1.0 billion per quarter and to have capacity for an annual increase in the dividend per ordinary share of around 4%, through 2025.”
I like the idea of using surplus cash at high-oil times for share buybacks. Rather than paying erratic special dividends, it should help even out shareholder returns and boost the company’s long-term ordinary dividend progress. Fewer shares in existence means extra cash per share for those who hold them.
It also means the company itself sees the BP share price as good value right now. And that helps strengthen my sentiment.
BP share price risks
Now, I’ve been glossing over the risks a little here. But they do certainly exist, and they’re not trifling ones. The obvious biggie is the oil price. Should it drop to around $30 levels again, that cash flow stream might turn into a trickle. And then there’s the actual path to net zero emissions. It would be easy to assume it’s all set out and sure to be achieved. But no, we’re far from that level of confidence.
On balance, I do think I am once again looking at a company that could deliver me a steady and rising income stream for years to come. The BP share price looks attractive to me.
