BP (LSE: BP) (NYSE: BP.US) is one of the FTSE 100‘s largest constituents and also one of the index’s dividend stalwarts. Indeed, at present levels the company’s shares support a dividend yield of 5.6% and the payout is covered more than three times by earnings per share. What’s more, BP currently trades at a lowly forward P/E of only 8.8.
However, BP’s shares are even more attractive than they first appear as the company is returning huge amounts to cash to investors via share buybacks. After adding in the cash returned via buybacks, BP’s implied yield jumps to 8.8%.
Cashing in
BP offers its investors a bit more than just a hefty dividend payout. The company’s share buyback plan, which has been in place for some time now, has been designed to return billions to shareholders. Combine these buybacks with the company’s hefty dividend payout and the company is second to none when it comes to shareholder returns.
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While some investors many not be convinced that buybacks are a good use of company cash, there’s no denying that they have their benefits. For example, by returning cash to investors buy acquiring its own stock, BP avoids the double taxation that usually applies to dividend payouts.
Further, buying back stock should increase earnings per share, which should drag BP’s share price higher over the long term.
Crunching numbers
Over the summer BP completed its first mega buyback. The total value of stock brought back was $8bn, the proceeds received from the sale of the company’s interest in TNK-BP. On a per share basis this works out as an additional distribution of around 26.5p per share.
And BP has more buybacks planned. The company has laid out plans to sell off another $10bn worth of assets before the end of 2015, with the proceeds earmarked for buybacks. $3.4bn worth of sales have already been agreed — it seems as if management are keen to deliver on their promise.
A $10bn buyback funded with asset sale, as well as the $8bn buyback undertaken with the proceeds from the disposal of TNK-BP, BP will have returned $18bn, or around £11.3bn to investors. With just under 19bn shares in issue, that works out at around 59.5p per share.
These are some impressive figures but they become even more appealing when you factor in BP’s dividend yield as well. During the past 12 months BP has returned a total of £7bn to investors though both buybacks and dividends. On a per share basis, these cash returns are worth approximately 37p per share, an equivalent yield of 8.8%.
