Is BP a Good Dividend Stock?

Is BP a Good Dividend Stock? It’s been a complicated year for the market, with wild swings and unusual consumer behavior. However, no industry has had more ups and downs than oil. When the travel industry was decimated by COVID, planes stopped flying, cruise ships were docked, and road trips were postponed.

Demand for oil dropped dramatically, and it was so sudden, there was no time to adjust supply. Storage facilities found themselves at capacity, which created a perfect storm: for a brief but memorable period in April, oil prices went negative. This was the first time in history such a phenomenon occurred.

It stands to reason that lower oil prices have an impact on energy companies like British-based BP. However, many investors don’t realize the full extent of that impact. Most know that cash flows suffer when oil prices drop, but the effect on a company’s asset values is less obvious.

In the United States alone, analysts project that oil companies will write off up to $300 billion – and that figure doesn’t begin to consider the total worldwide. 

These write offs are expected to appear in second quarter financial results. Income investors who have relied on BP, or those considering a purchase of BP, have always known it to be a strong dividend stock. However, given current challenges, is BP a good dividend stock today? 

Should You Sell BP Stock?

The fact is that things aren’t looking good for BP – at least in the near-term. In mid-June, the company announced that it expected to report between $13 billion and $17.5 billion in write downs when second quarter financial reports are released.

Approximately $11 billion of that is assigned to loss of value in property, plant, and equipment, which had a total value of $88.6 billion as of March 31, 2020. The remainder – up to $10 billion – is assigned to intangible exploration assets, which were valued at $14.2 billion last quarter. 

Other analyst projections include a decrease in earnings per share of roughly 220 percent year-over-year. Quarterly revenue is expected to total approximately $42.23 billion, which represents a year-over-year decrease of nearly 43 percent. 

Full-year earnings estimates aren’t much better. Analysts have suggested that a loss of $0.57 per share is the best case scenario, and even that is a 120 percent drop as compared to last year. The year’s revenue is expected to total less than $200 billion, which is a decrease of nearly 30 percent. 

Worse still, BP’s share prices aren’t seeing the same gains that the rest of the market is experiencing. In fact, BP shares aren’t even keeping up with the industry. For July, the oil and energy sector gained more than 3 percent, while BP lost approximately 2.5 percent. As a result of these financial challenges, BP advised its employees that it would be reducing the company’s workforce by approximately 15 percent. 

Given those projections, many investors have decided it’s time to stop their losses and sell BP stock. While BP may eventually recover, it is likely to be a long road back. That makes alternative investments far more appealing. 

Why Buy BP Stock?

From a short-term perspective, there may be some benefits to buying BP stock. The company is trading on the lower side relative to the stock’s prices over the past two years, and it is making some bold moves to offset its 2020 losses.

Among other things, BP is divesting its global petrochemicals business, which will bring in cash. That’s critical right now, given the current state of BP’s balance sheet.

These types of moves may make it possible for BP to maintain its dividends and grow share prices, at least temporarily, leading to short-term gains for those who invest now. 

Longer-term, some industry experts have expressed concern that this move – and others like it that are currently under consideration – may weaken BP. Diversification is important for businesses, just as it is for investors.

Over-reliance on a small number of revenue streams puts the company at a financial disadvantage when one of those revenue streams is disrupted. 

All of that is to say there might be opportunity for a limited number of investors to achieve short-term gains with BP stock. Those that are comfortable with the level of risk may benefit from buying BP stock now, but a majority of investors will likely be better served by an alternative energy stock. 

Is BP a Good Dividend Stock?

Historically, BP’s dividend has been one of its biggest selling points among investors. With a yield of 11 percent, BP is far ahead of competitors like Exxon [XOM] and Chevron [CVX], which have recent dividend yields of 8 percent and 6 percent respectively. The problem is that dividend is unlikely to be sustainable under current conditions.

Major industry players like Equinor ASA and Royal Dutch Shell have already announced dividend cuts, which – while not exactly unexpected – caused a bit of shock. After all, Shell hadn’t made such a move since World War II. 

In short, oil companies develop financial strategies around capital spending and dividends based on assumptions about oil prices. The biggest players have designed their plans based on US oil prices coming in between $38 per barrel and $75 per barrel. Given the events of recent months, adjustments will be necessary, and chances are that dividends will be cut to close budget gaps. 

It’s hard to say what a dividend reduction might look like for BP, but analysts have made some fairly sobering predictions.

Experts from financial giants like Goldman Sachs [GS] and Citigroup [C] are projecting dividend reductions of between 30 percent and 65 percent. That could present a problem for BP’s income investors. 

The Bottom Line: Is BP Dividend a Value Trap?

For decades, BP has been a solid income stock, and its dividends were fully supported by its financials. Unfortunately, in today’s economy, the contrast between BP’s financial situation and its high dividend yield points to a dividend value trap.

Investors are still buying shares based on the company’s high dividend yield, but they are likely to be disappointed. Most analysts agree that BP can’t possibly sustain that yield, which means a cut is probably coming sooner rather than later. 

Generally speaking, BP is facing challenges that are likely to impact profitability for some time – and that assumes that there won’t be any additional economic disasters along the way. While some investors might be able to get in and out at just the right moment to benefit from a BP stock purchase, most will be better served by adding other energy companies to their portfolios. 

One of the current favorites among analysts is Canadian Natural Resources [CNQ], which has been better able to weather the recent financial storms. This company has a long history of increasing dividends, even when its peers were unable to do the same.

That’s primarily because it relies on a far lower average crude oil price as compared to competitors like BP. That’s good news for Canadian Natural Resources’s income investors, as the likelihood of dividends being decreased or eliminated is much lower than the outlook for BP.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.