The BP (LSE: BP) share price has leapt 37% in 2022. Based on current dividend forecasts for 2022, the oil stock carries a 4.5% dividend yield.
This beats the FTSE 100 forward average by around half a percentage point. And things get even better for 2023. For then the dividend yield marches to 4.8%.
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But do these attractive readings make BP shares a top buy? Here I’ll drill into its dividend forecast for the short-to-medium term and reveal whether I’d buy this dividend stock for my own portfolio.
Dividends to rise again?
BP has cut the annual dividend twice since 2019.
Two years ago it responded to the pandemic and sinking oil prices by paying a dividend of 26.25 US cents per share. This was down from 41 cents a year earlier. And in 2021 it reduced shareholders’ rewards again, to 21.63 cents.
But City analysts think BP is about to resurrect its progressive dividend policy. Dividend forecasts for 2022 and 2023 suggest full-year payouts of 23.22 cents and 24.82 cents respectively.
Flush with cash
BP’s dividend yields are on the larger side compared to the market average. But admittedly they do trail some of the monster yields that many FTSE 100 shares alone currently boast.
On the plus side, there’s a great chance the oil stock will be able to meet dividend forecasts. By comparison, most other stocks look far riskier as the economy cools and earnings comes under pressure.
BP’s dividends for the next two years are covered between 6 times and 4.3 times by anticipated earnings. This gives an enormous margin of error should earnings estimates miss the target.
BP has one other weapon in its arsenal. A cash-flush balance sheet will also give it the firepower to make these predicted dividends. Surplus cash flow rocketed to $6.6bn in the second quarter of 2022 from $695m a year earlier.
In fact BP has so much cash that it announced a fresh $3.5bn share buyback programme in August.
The verdict
Despite its big dividends, however, I’m not tempted to buy BP shares today.
Oil prices have soared above $95 per barrel following OPEC+’s decision this week to cut production. Oil prices could continue rising in the short-to-medium term too as strain on the supply side persists.
But I won’t buy BP because of the uncertain outlook for oil demand over the long haul. As alternative energies like renewables, hydrogen, and nuclear take over from fossil fuels, businesses like this face a sharp fall in profits.
The business plans to build 50GW of its own renewable energy capacity by the end of the decade. But the company continues to spend significantly more on oil and gas assets. So oil will remain the critical driver for shareholder returns, creating massive risk.
BP aims to raise the annual dividend by 4% through to 2025. It also wants to execute $4bn worth of share buybacks a year over the period. However, extreme danger beyond then makes the stock one to avoid in my opinion.
