BP Dividend’s, Yielding 5.3%, Comes With a Catch

Bill Barnhart

As BP (BP) plans its new life with a criminal rap sheet, the energy giant is presenting two inducements to stock investors: a rich dividend yield and its stated focus on the long term cash returns. These incentives can be incompatible.

[More from YCharts.com:Royal Dutch Shell’s 5% Dividend Yield (Part 1): Beats Junk Bonds: ]

In late October, BP boosted its quarterly dividend to 9 cents, up 12.5% from the 8 cents paid in the previous quarter. That’s still short of the 14-cent rate paid just before its Gulf of Mexico oil spill in April 2010 (BP suspended its dividends for a year after the spill). In its third-quarter earnings conference call, BP said the latest boost came ahead of its internal schedule.

[More from YCharts.com:Shell’s 5% Dividend Yield (Part 2): Will Huge Capital Spending Pay Off? ]

The stock’s current dividend yield (the most recent 12 months of quarterly dividends paid divided by the current share price) is a generous 5.3%, the highest of peer energy conglomerates Exxon Mobil (XOM), Royal Dutch Shell (RDS-A) and Chevron (CVX).

[More from YCharts.com:Shell’s 5% Dividend Yield (Part 3): Total Return Story is Compelling]

BP Dividend Yield Chart
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BP Dividend Yield Chart

BP’s dividend payout ratio, at 30% of net income, is also the highest of the four peer companies.

BP Payout Ratio TTM Chart
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BP Payout Ratio TTM Chart

BP says its dividend policy relates to its $38 billion in one-time assets sales since the Gulf disaster. Wall Street expects the post-disaster company to constrain growth. BP says it’s refocusing on high-margin oil exploration and production, including production in Russia.

Among the financial statement tests of BP’s resolve to refocus on high-margin projects upstream (exploration and production vs. marketing) since the Gulf disaster are the percentage growth trend in its quarterly capital spending, compared to peer companies, and the year-over-year growth rate in BP’s long-term investments. Neither measure reads especially well for BP stockholders expecting a track record that would support a robust dividend forecast.

BP Capital Expenditures Quarterly Chart
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BP Capital Expenditures Quarterly Chart

Since the end of the first quarter 2010, just before the Deepwater Horizon explosion and oil spill disaster, BP’s long-term investments as a share of total assets has slipped to 10.9% from 12.6%.

In short, the jury is out on BP’s refocus on long-term upstream investments as well as its dividend resiliency. Now, it looks like the company is more committed to the dividend carrot.

Bill Barnhart, a contributing editor at YCharts, is a 36-year veteran of business reporting. Most recently he was the financial columnist for the Chicago Tribune, where he offered daily commentary on financial markets. He is a past president of the Society of American Business Editors and Writers.

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