BP Stock: 8% Dividend Not Worth The Gamble

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One of the hottest topics of debate on Wall Street in the past two years is when the oil market will bottom and what will happen next. With shares now sitting near 20-year lows, BP (BP) stock owners are hoping that they can continue getting paid more than 8% per year while they watch and wait for the oil saga to play out, but reality may be a bit more complicated than that.

BPBP’s current dividend yield is the company’s highest yield in more than five years, but it’s not because management is feeling particularly generous. BP stock is now down more than 38% in the past two years, and its dividend yield only nosed above the 8% mark following a nasty Q4 earnings miss. The company reported net losses of $6.5 billion on the year in 2015.

Dividend Safe… For Now

The more you dig into BP’s poor performance, the less appealing and less certain that huge yield seems to get. However, despite market skepticism, CEO Bob Dudley is reassured investors that the dividend is safe in its Q4 earnings release:

“Our plans set out a clear course for BP for the medium term and will allow us to deliver growth in the longer term. All of this underpins our commitment to sustaining our dividend and then growing free cash flow and shareholder distributions over the long term.”

The “clear course” he refers to includes the aggressive cost-cutting measures the company has planned, such as laying off 7,000 employees and trimming an additional $7 billion in costs through 2017. BP already reduced expenses by $3.4 billion in 2015.

While other oil stock investors must pin their hopes on a bounce-back in oil prices, BP stock owners only need for the company to stabilize enough for the dividend to be protected. Unfortunately, that seems like a big “if” at this point.

Deja Vu?

Investors are now hoping that the dividend suspension and subsequent 50% reduction in 2010 following the Deepwater Horizon oil spill was more of a PR move for the company than a financial necessary, especially considering the company’s revenue and income levels are now below their lowest point during both the Financial Crisis and the Deepwater spill saga.

Unfortunately, the public headlines of firing 7,000 employees while defending its BP stock’s 8% dividend yield might soon put a similar type of PR pressure on BP to echo its 2010 dividend cut. The company’s debt-to-equity ratio of 0.55 is also near the high point of its historical rage, yet another argument against such a large payout.

With oil prices spending much of January near multi-year lows, it’s likely that BP has at least one more horrendous quarter ahead of it in Q1 as well. ConocoPhillips (COP) shareholders found out recently that one quarter is all the time it takes for a company committed to a “compelling payout” to cut that dividend by 66%.

Better Options Elsewhere

While the idea of buying into a high-yielding diversified oil stock may seem like a safe and profitable way to wait out the oil downturn, BP is probably not the safest bet in the market. Instead, investors should consider BP rival Exxon Mobil Corporation (XOM), which pays a more modest 3.6 percent dividend but maintains a reasonable payout ratio of only 60%.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/bp-stock-dividend-2/.

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