BP is coining it and has scope to hike the dividend

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BP PLC (LON:BP.) is reducing debt faster than anticipated and that spells good news for pension funds and income investors.

The oil giant has traditionally been a big payer of dividends, albeit it has occasionally had to choke off the dividend spigot in times of crisis, such as in 2010 when it was embroiled in the Macondo well oil spill disaster in the Gulf of Mexico.

By 2019, the dividend had still not recovered to pre-Macondo levels when the coronavirus pandemic and the concomitant lockdown restrictions drastically reduced demand for oil, resulting in a slump in the oil price that hit the margins of BP and its peers hard.

Even Royal Dutch Shell (LON:RDSB), where for many decades a dividend cut was thought only marginally more likely than the Pope converting to Islam, cut its pay-out in 2020 as it waited for the post-pandemic dust to settle. BP duly followed suit.

BP dividend data

Source: dividenddata.co.uk

In keeping with companies in many other sectors, the oil titans cut costs to the bone and eschewed discretionary outlays in 2020 but now the oil price has recovered to around US$63 a barrel – Brent crude was trading at less than US$32 a barrel a year ago – and the oil industry is singing “Happy Days are Here Again”.

Assuming the company retains a fairly tight control on costs, is the time right for the company to crank up the dividend again?

Bernard Looney, the chief executive officer, isn’t saying yet, although Tuesday’s trading update did remind shareholders that on reaching its net debt target ahead of schedule, “BP is committed to returning at least 60% of surplus cash flow to shareholders by way of share buybacks, subject to maintaining a strong investment-grade credit rating”.

Show me the money

Share buybacks are popular with directors because they boost earnings per share and thus make the directors look good. Shareholders, most of whom are not earning the sort of salaries plus bonuses enjoyed by directors, tend to prefer hard cash in the form of dividends but companies are generally reluctant to increase the dividend too quickly lest they have to cut it again when times get hard.

Nevertheless, while we wait for BP’s glacial progress towards becoming a full-on tree-hugging sandals-wearing non-fossil-fuel energy company, the company could earn some brownie points with pension funds by stoking up the dividend furnace.

Looking at the last five years, and bearing in mind my data source does not indicate what currency these numbers are in – I am going to assume dollars – Royal Dutch Shell is the biggest payer of dividends among FTSE 100 companies, paying out US$58.9bn, while BP is the third-largest with pay-outs of US$30.7bn.

Over the same period, Royal Dutch Shell has spent 12.67bn quid/dollars/euros on share buybacks, having committed in 2018 to buying back US$25bn of shares by the end of 2020 (a commitment derailed by the pandemic) while BP has repurchased a relatively paltry US$2.98bn.

If the global emergence from lockdown goes well … (a big IF)

So, as can be seen, the two oil titans are real cash cows and a boon for income investors. Royal Dutch Shell has paid out just over twice as much over the last five years as the Footsie’s fourth-biggest payer, Rio Tinto PLC (LON:RIO).

To put it all into perspective, 40% of the Footsie has paid out less than £1bn in dividends over the same time period.

If broker forecasts are to be trusted, BP is expected to pay a dividend of 15.1p this year, down by about a quarter on 2020, and as yet the consensus seems to be that the dividend will merely be held in 2022 and 2023.

Trading at 300.75p, even my rusty arithmetic can calculate in my head that’s about a 5% yield.

Earnings per share this year are forecast to be 36.9 cents – I’m beginning to think this single currency thing wasn’t such a bad idea after all – which even after converting to pence indicates the dividend payment is comfortably covered by projected earnings.

Assuming that the world does not make a total hash of emerging from lockdown – a fairly large assumption given human nature – then the dividend looks rock solid with plenty of scope for improvement.

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