BP plc (ADR) (BP) is getting hammered by bad news as it continues to prove itself among the worst performing oil majors these days … and yet the massive dividend remains safe. For now.
It’s kind of amazing after BP had a horrible 2015. The drop in oil prices and a slew of charges led BP to take a full-year net loss of $5.2 billion — its worst showing since the Deepwater Horizon disaster in 2010.
In the most recent quarter, BP said adjusted earnings fell 91% to $196 million from $2.2 billion a year ago. That missed Wall Street estimates by a wide margin. And in a sign that BP is desperate to cut costs even more, the company announced the elimination of another 3,000 jobs.
Despite all that, BP maintained its dividend. With BP stock tumbling Tuesday — and down more than 20% in the last three months, the yield on the payout is over 8%. We’re talking junk bond levels here.
Of course, a high dividend yield is often a sign of a sick stock, and it’s a matter of debate if BP can afford to keep its huge payout. For now, the odds are on BP’s side.
For one thing, the company is willing to raise debt to keep the dividend spigot on. That’s fine, except that the company’s credit rating is under review with a negative bias. Should that come to pass, the debt market is going to get pricier for the oil major.
But it would still get the cash.
BP Stock — The Purse Is Full for Now
It’s also important not to underestimate the strength of BP’s balance sheet and cash flow statement.
BP paid out $6.7 billion in dividends last year. True, free cash flow went negative to the tune of $2.5 billion, but with $27 billion in cash and cash equivalents on the books, the company can afford the current dividend.
Not forever, mind you. The dividend isn’t covered by earnings and continued negative cash flow would eventually deplete the well. The dividend is not, however, in imminent danger.
It’s also reassuring that BP has said it intends to “protect the dividend at all costs.” So it sounds like management would rather sell off more assets and make deeper cuts to capital expenditures than mess with the dividend.
For the time being, BP has adequate resources to fund the dividend, but the clock is ticking. As long as oil prices remain depressed, the dividend part of BP stock is going to come under increasing pressure.
BP probably has a couple of years before the dividend is no longer defensible. If you’re willing to play chicken with the oil market, go for it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
