Unlike oil giants such as ExxonMobil, or Chevron, which have long histories of growing dividends steadily over time, even during trying industry conditions, BP doesn’t have a streak to defend. BP’s annual dividend growth of just 1.4% per year over the last decade underscores its struggle to reward shareholders with meaningful income growth. Considering the company’s strained balance sheet and costly production contracts, capital preservation will remain a major priority if oil stays low.
Source: Simply Safe Dividends
In addition, unlike many US companies, which tend to see every dividend increase as an ongoing commitment to pay at least that much going forward, European firms are far more apt to variable dividend payouts as their earnings rise and fall.
In other words, BP investors who are mainly concerned with consistent, secure, and growing income should be doubly concerned about BP’s prospects.
Valuation
BP PLC (ADR) (NYSE:BP) isn’t generating profits at current oil prices. This makes traditional valuation methods such as the P/E ratio ineffective.
However, even when we look out to as far as two years in the future, when most analysts think that oil prices should have recovered nicely, BP’s forward P/E ratio sits just over 70, suggesting the company’s stock is rather overvalued or a major increase in earnings is around the corner.
What if you aren’t concerned with capital gains (i.e. price appreciation)? Surely that 6.6% yield makes BP an attractive buy, right? Especially considering that BP’s average five-year dividend yield is 5.4%.
In reality, of course, such a high-yield indicates that the market is pricing in a likely dividend cut, which could cause the share price to sink further.
In other words, no matter which way you look at it, either from a potential capital gain or income generating method, BP appears far from the screaming value that one might expect on offer during what some are calling the worst oil crash in almost 50 years.
In my view, BP is far more likely to be a value trap than a bargain. Many times you get what you pay for.
Conclusion
While the unpredictable nature of oil prices means that one can’t necessarily declare BP’s current dividend in imminent peril, a few things are safe to conclude.
With a far more leveraged balance sheet, ongoing legal costs associated with the 2010 Deepwater Horizon disaster that serve as a competitive disadvantage, a number of costly fixed production contracts with foreign countries, and far less efficient operations than large, US rivals such as Exxon and Chevron, BP represents one of the riskier big oil dividend stocks you can own today.
Reaching for yield is more tempting than ever in today’s environment, but it’s also more important than ever for income investors to stay disciplined and continue executing effective dividend investing habits (3).
Disclosure: None
Additional Links:
(1) http://www.reuters.com/article/bp-ratings-idUSL3N16150B
(2) http://www.simplysafedividends.com/dividend-payout-ratio-how-to-calculate-and-apply-it/
(3) http://www.simplysafedividends.com/effective-dividend-investing-habits/
