Is BP plc In Good Shape To Yield 6.7% In 2015?

Royston Wild explains why predicted dividends at BP plc (LON: BP) could be the stuff of fairytales.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at why dividend chasers could be taking a huge gamble by investing in BP (LSE: BP) (NYSE: BP.US).

Dividend resurrection expected to roll on

Since being forced to slash the dividend some four years ago, BP has rebuilt its reputation as a lucrative income pick as aggressive project sales and cost-cutting has enabled the firm to reward shareholders through a combination of chunky payout hikes and generous share buybacks.

Indeed, the oil colossus has lifted the full-year dividend at an impressive compound annual growth rate of 20.8% since then, and City analysts expect the company to keep its lucrative payment strategy rolling in the medium term at least.

BP is expected to lift the total dividend 5%, to 38.8 US cents per share, in 2014. And an extra 4% increase is anticipated in the following 12-month period, to 40.3 cents.

As a consequence, the oil leviathan’s history of offering market-smashing yields is set to continue, and an impressive figure of 6.4% for this year rises to an eye-popping 6.7% for 2015.

… but weakening market fundamentals cast cloud

However, I believe that forecasts of further increases through to the close of 2015 could be in severe jeopardy, most notably due to the relentless nosedive in the oil price. The Brent benchmark has halved in less than six months, and has punched numerous five-year troughs below $60 per barrel in recent days.

It is impossible to guess just how far the black gold price still has to fall before producers take action to stem the rampant oversupply in the market. Indeed, just last week Saudi Arabian oil minister Ali Al-Naimi warned that it would be “difficult, if not impossible” for OPEC members to slash output as the world’s other major producers continue to pump.

The group is responsible for 40% of global output, so these remarks are likely to keep the oil price in the doldrums if proved correct. Meanwhile US shale gas production — also a major contributor to the descending commodity price — is also expected to keep surging in coming years despite current weakness.

With a stuttering global economy failing to pick up the slack in the market, revenues at the likes of BP could be set to collapse and once again put paid to its progressive dividend policy.

The oil giant was forced to cut the full-year dividend 63% in 2010 to 21 cents per share, the last time oil prices fell through the floor, a situation which could easily repeat itself given the meagre dividend coverage on offer — prospective earnings at BP next year cover the dividend just 1.5 times, well below the minimum safety benchmark of 2 times.

With BP also facing the prospect of rising exploration and refining costs; gargantuan financial penalties owing to the 2010 Deepwater Horizon oil spill; not to mention an increased reliance on a much-smaller portfolio of assets to deliver long-term earnings growth, I believe that the business could become a dicey dividend selection next year and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »