It seems like only yesterday that oil prices were plunging below $45 a barrel, with some City pundits even gnashing their teeth and warning us to expect $20 and worse! Well, the more ebullient of the world’s commentators always over-egg their claims (some were forecasting $200 a barrel at the height of the boom), and Brent Crude has climbed back around the $53 mark.
The more sensible of us don’t worry about short-term price fluctuations anyway, and instead look instead to rational valuations. To my mind, high-yielding dividends figure pretty high in the list of priorities — and our two big FTSE 100 oilies are offering some of the best on the market.
Dividends still growing
BP (LSE: BP) has maintained its dividend right throughout the oil price downturn. In fact, it’s continued to increase the cash it has handed back to investors, providing them with a 6.3% yield in 2014. With the share price down around 397p, forecasts for this year suggest a massive 7.4% — and that’s after the shares have put on 20% since the end of September, so the yield has actually fallen.
At Royal Dutch Shell (LSE: RDSB) we see something very similar. The share price has also recovered this month, to 1,834p as I write, but even with that we’re still looking at a forecast dividend yield of 7.6% for the year to December 2015 — which would maintain the annual cash at the same level as the past two years.
The downside is that these bumper dividends are not well covered by earnings forecasts. BP’s earnings per share would actually fall just short of its dividend prediction this year and would still be a penny short based on 2016 prognostications. But things look better at Shell, with modest cover of around 1.1 times for this year and next.
The question is whether the two companies will continue to hand over the cash while oil prices are low, and I think the answer is yes. At interim time, BP affirmed its commitment by announcing a 6.5p dividend for the second quarter, ahead of last year. Shell, meanwhile, did what was expected and kept its Q2 payout at the same level as a year previously in dollar terms (31p per share to UK investors).
More pain to come?
Weakening economic data suggest we’re not out of the woods yet, and some are fearing a renewed downwards spell for oil prices. But the total well count is falling and production is dropping, and that trend will surely continue while such a large portion of the world’s production faces unprofitable costs. The market will sort things out, as it inevitably does when there’s an excess of supply of anything — and in the case of oil, that excess is really pretty small.
I reckon September and October this year could well turn out to have been the time to get back into oil shares, and BP and Shell are among the safest long-term options there are — and who wouldn’t want more than 7% in cash?
