From 1999 through 2009, oil giant BP (NYSE: BP) was a dividend-raising machine, boosting the dividend 16 times during that span. What started out as a $0.3025 quarterly dividend grew to $0.84 – a healthy compound annual growth rate of 10.75%.
But then, in 2010, BP dumped a few hundred million barrels of oil into the Gulf of Mexico and that all changed. In 2011, the company cut its dividend in half. That’s not surprising considering the spill cost BP billions of dollars in costs and fines.[ad#Google Adsense 336×280-IA] The company swung from a $16.5 billion profit in 2009 to a $3.7 billion loss in 2010.
Cash flow from operations was cut by more than half, from $27.7 billion to $13.5 billion in the same period.
Despite the ongoing fines and legal issues related to the spill, BP’s finances have rebounded quickly.
Over the past 12 months, earnings are higher than they’ve ever been.
And cash flow, while not at the previous high levels of 2009, have recovered as well.
As the finances have come back, so has the dividend, although not to where it was in 2010. But BP has raised the dividend five times in the past three years, including three times in 2014.
However, with oil prices plummeting, how safe is the current $0.60 per share dividend, which equals a 6% yield? That’s what Isabel A. wants to know.
The oil giant reported fourth quarter and full-year results Monday night. During the quarter, it lost only a few billion dollars and ended up beating analyst estimates. But that was mostly due to accounting tricks. The company took a $3.6 billion write-down of impaired assets in the North Sea and Angola.
As you know, in this column, what I’m really concerned about is cash flow. It’s much less susceptible to accounting manipulation.
And 2014 wasn’t so bad. The company generated $10.2 billion in free cash flow, while paying out $5.9 billion in dividends. That’s a payout ratio of 58%. So that is no problem at all.
What may be a problem, however, is going forward. Free cash flow is forecast to plummet over the next few years. Wall Street analysts, the majority of whom are bearish on BP, expect free cash flow to fall below the $5.9 billion dividend-payout number and stay there until 2017. Even then, in 2018 and 2019, free cash flow is not expected to be much higher than what the company paid out in dividends in 2014.
Those free cash flow estimates through 2019 fell by about a billion dollars a year between Monday and Tuesday (after the company reported results). Of course, a rebound in oil prices would likely change those estimates significantly.
Like the large investment banks that seem to pay penalties for the mortgage meltdown, nearly every quarter, BP is still on the hook for fines from the oil spill.
A trial just wrapped up that could result in BP being fined as much as $13.7 billion. The results won’t be out for months, so that’s always a wild card.
In the recent earnings call, company executives said that the dividend is a priority. That’s nice to hear and it’s certainly better than them not saying it (hopefully, they believe it).
But we’ve heard that before in other companies like Seadrill Ltd. (Nasdaq: SDRL), which then eliminated the dividend just a few months later.
So we have a stock with a decent track record of dividend raises, though it did make a cut when it had to.
It had no problem paying the dividend out of free cash flow last year, but it will this year and possibly will for several years more.
Of course, if oil prices recover, that could change everything.
I don’t believe a cut is imminent for BP, but considering it cut the dividend before when times got tough, it’s certainly a possibility in the future.
Dividend Safety Rating: C
— Marc Lichtenfeld[ad#wyatt-income]
Source: Wealthy Retirement