Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
BP’s dividend growth score of 2 indicates that the lack of security of the current payout means that investors shouldn’t expect any meaningful growth from the dividend for at least several years.
In fact, due to the unsafe nature of the company’s payout, current shareholders will be lucky to avoid a dividend cut over the next year or two unless oil prices drastically improve in the coming quarters.
Now given that after the 2010 Deepwater Horizon oil spill BP sold $75 billion worth of assets to guarantee it could cover any legal liabilities it would incur, which has BP sitting on $23.5 billion in cash at the moment, you might think that BP might be better positioned than most oil giants to sustain its current dividend. Or even potentially grow it, albeit slowly.
However, while the lawsuits over the Macondo incident are indeed pretty much settled at this point, management expects that future cash costs over the spill will come to over $22 billion. In other words, pretty much wiping out the company’s war chest and leaving almost no room for dividend growth.
That being said, BP remains committed to the dividend for now. In fact, the company is planning an additional $3 to $5 billion in asset sales this year, and then $2 to $3 billion more annually to help keep the payout going until oil prices inevitably recover.
Thanks to its plans to cut capex spending to $17 billion this year and to $16 billion next year (representing more than a 30% drop in spending versus 2013), the company is confident that it can begin generating free cash flow if oil prices climb above $50 to $55 per barrel.
“We are sticking to our financial frame and this is putting us on track to rebalance organic sources and uses of cash by 2017 at $50-55 per barrel. This will allow us to sustain our dividend while still maintaining the flexibility to grow.”
Bob Dudley, group chief executive
Given that Brent crude, the global standard, is currently $52, this might give investors hope that maybe BP’s dividend outlook isn’t as bad as its current sky-high yield may indicate.
However, there are three key things for investors to remember. First, selling off assets to support the dividend is a short-term solution only; one that results in lost cash flow going forward.
Second, in its latest investor presentation, BP clarified that its dividend won’t be covered by free cash flow at around $52.50 per barrel, but merely that operating cash flow will cover capital expenditures. In other words, around $52.50 in Brent oil prices, BP will start generating free cash flow.
However, remember that the key to securing the dividend, much less growing it, means that BP needs to generate over $5.5 billion in free cash flow. Given management’s latest guidance, that won’t occur until crude hits much higher prices and remains there for a prolonged period of time.
That’s because BP’s operating cash flow needs to be able to cover all its operating costs, including debt service, capital investments, the dividend, and the ongoing Deepwater Horizon liabilities. That isn’t likely to happen, at least according to management, until around $65 per barrel. Meanwhile, dividend growth would likely have to wait until crude hits, and stays above $70 for several quarters.
Given the uncertainties about global economic growth, and the slowing increase in oil demand, this level might take years to achieve. In fact, based on BP’s plans through 2020, I think a best case scenario is BP maintaining the current payout through 2018, and only being able to raise the dividend modestly in 2019.
Source: BP Medium-Term Outlook Presentation
A third reason to not expect much payout growth from BP is the company’s inconsistent dividend growth track record. As you can see, BP is hardly a dividend aristocrat (learn about all the aristocrats here), meaning management has proven more than willing to cut the payout in previous times of industry downturns or company distress.
