Oil stocks have long been popular stocks for investors seeking big dividends. And based on current dividend forecasts BP (LSE:BP) shares look like an attractive choice for the short to medium term.
A 15% share price drop in just over a month has given the FTSE 100 firm’s dividend yields a healthy lift.
Should you invest £1,000 in BP right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?
For 2023 the yield sits at an appetising 4.8%. Furthermore, for 2024 and 2025 the dial moves to 5.1% and 5.4% respectively.
These readings comfortably beat the Footsie’s forward average of 4%. On top of this, the yields on BP’s shares also beat those of blue-chip rival Shell.
However, just how realistic are current dividend yields for the energy giant? And should I buy its shares for my portfolio?
Good dividend cover
BP has had a more volatile dividend history in recent times. Shareholder payouts dropped in the aftermath of the Covid-19 crisis when oil prices dropped and profits took a hit.
But the oilie raised dividends again in 2022. And City analysts expect them to continue rising for the next three years at least. A predicted reward of 22.55p per share for 2023 is tipped to increase to 24.24p next year and then to 25.55p in 2025.
Its recent dividend history illustrates how payouts are very sensitive to energy market conditions. Still, strong dividend coverage suggests that BP will be in good shape to meet current estimates.
Expected dividends are covered by anticipated earnings three times by 2023. And coverage comes in at 3.2 times and 3.1 times for the following two years. Any reading above two times is said to provide a wide margin of error.
Uncertainty beyond 2023
Continuous demand for energy means that oil producers have strong cash flows that help them to pay large dividends. Industry majors like BP, which locate, produce, refine, distribute and market the black stuff, are renowned for having particularly stable cash flows.
This quality forms the bedrock for the company’s healthy dividend forecasts. I certainly feel that it is in great shape to pay the reward brokers are expecting for this year.
But an uncertain outlook for oil prices beyond 2023 means payout estimates are less robust, despite that solid dividend cover. Earnings could easily crash down to earth if fossil fuel demand drops again.
On the plus side, crude values could remain supported if OPEC+ countries to keep production curbs in place. Yet prices could also plummet if high interest rates stay in place, exerting pressure on an already weak global economy.
The verdict
It’s critical to remember too that BP also operates in a capital-intensive industry (the firm has forecast capital expenditure of $16bn to $18bn in 2023). Such large costs will put extra pressure on dividends if profits and cash flows dry up due to weakening oil prices.
All things considered, I think I’d rather buy other FTSE 100 stocks for dividend income. Tough macroeconomic conditions threaten payouts during the next three years. And the steady growth of green energy poses a danger to BP’s profits and dividends over the longer term.
