Six things you should know about BP’s dividend

BP dividend forecast 2018

BP (LON: BP) (BP.L) is a popular dividend stock among UK investors. With a dividend yield of 6.1% right now, that’s understandable. However, if you’re thinking of buying BP for its big dividend, there’s certain things you should know.

US dollar dividend

The first thing to note about BP’s dividend is that it is declared in US dollars. That’s partly why the yield is so high at present, because sterling is so weak. The fact that it is declared in US dollars is something to keep in mind, especially if you depend on your dividends as a source of income. If sterling was to strengthen, your payout would be less.

Low dividend growth

The next issue with BP’s dividend is that growth of the dividend is non-existent right now. BP has paid its shareholders 40 cents per share in dividends for the last two years. Looking ahead at dividend forecasts for 2017 and 2018, City analysts do not expect any growth this year or next.

2017 / 2018 dividend forecasts

As it stands, the consensus dividend forecasts for 2017 and 2018 are actually 39 cents each year. This suggests that some analysts believe a dividend cut is likely.

However, given that the company has declared three 10 cent dividend payments already this year, I believe a full-year payout of 40 cents is the most likely result.

Low dividend cover

Could BP cuts its dividend? With the low oil price having taken its toll on profitability in recent years, a dividend cut is certainly not impossible. Analysts currently expect earnings of 29 cents this year, which is significantly below the consensus dividend payout of 39 cents. That’s a dividend coverage ratio of 0.74 which is clearly not sustainable in the long term.

Oil price needed

However, in its recent Q3 results, BP stated that the oil price needed to cover its capital expenditure and its dividend is now $49. With the oil price currently hovering around the $62 mark, BP should be able to continue to make its dividend payments for now.

Management comment

Lastly, I think it’s worth noting this Q3 comment from BP Chief Executive Bob Dudley:

We are steadily building a track record of delivering on our plans and growing across our businesses. This quarter, three new Upstream projects and the highest Downstream earnings in five years, underpinned by reliable operations and disciplined spending, have generated healthy earnings and cash flow. There is still room for further improvement and we will keep striving to increase sustainable free cash flow and distributions to shareholders.

That’s an upbeat statement from management, and demonstrates that “distributions to shareholders” ie. dividends, are a priority for the company.

Disclosure: Edward Sheldon, CFA has no position in BP at the time of writing.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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