Close to 513p (2 May), the BP (LSE: BP) share price is around 8% down since last October.
It’s wiggled around a bit since then, but from mid-April the stock’s been following the oil price lower.
With a cyclical sector like oil and gas, such volatility is normal.
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A big yield for passive income
But BP’s ups and downs may be worth the discomfort because of its above-average dividend yield. City analysts’ estimates suggest a yield of around 5% for 2025. That’s above the 3.9% median rolling dividend yield for the FTSE ALL-Share index.
However, for me, there’s a problem.
BP doesn’t fit my rules for a dividend-paying stock.
My first requirement is that a company must have steady, gradually rising dividends. But BP fails that test:
| Year to December | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024(e) | 2025(e) |
| Dividends per share (cents) | 39.7 | 41 | 31.5 | 21.4 | 24.2 | 28.6 | 30.3 | 32.3 |
| Dividend growth | (0.7%) | 3.22% | (23.2%) | (32%) | 13% | 18.1% | 5.94% | 6.6% |
The period through the pandemic was challenging for companies in the carbon fuels sector when the price of oil plunged. But BP still hasn’t returned the dividend to its 2018 level.
Instead of restoring the shareholder payment, the directors rebased it lower in 2022.
However, through 2021 and 2022, the price of oil shot up and exceeded its 2018 level. Even today the black stuff sells around 2018 prices.
So why the cutback in dividends?
Directors’ dividend decisions often reveal their confidence about the outlook for a business. So, for me, the dividend record is a negative.
Plenty of cash-generation
It’s not as if the company has been strapped for cash:
| Year to December | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
| Operating cash flow per share (cents) | 114 | 126 | 60.1 | 117 | 216 | 181 |
| Capital expenditure per share (cents) | 83.1 | 75.6 | 60.9 | 53.7 | 63.6 | 80.5 |
| Free cash flow per share (cents) | 30.7 | 50.7 | (0.712) | 62.8 | 152 | 100.5 |
For context, shareholder dividends in 2023 cost $4.8bn, which works out at about 38.64 cents per share.
It looks like BP had enough free cash flow to pay more to shareholders via the dividend, but it didn’t. Meanwhile, in 2023, the cash level on the balance sheet rose to just over $33bn from around $29bn in 2022.
One possible reason for the cash-hoarding is BP’s strategy aimed at transforming itself into an integrated energy company – it may be keeping money back for future investments.
The company’s vision is attractive. But there’s still a long road to travel with the full transformation to greener energy. In 2023, the majority of earnings came from oil and gas. On top of that, the company is still investing more in carbon energy projects than in renewables.
Still cyclically challenged
So, for the time being, BP is tied to the cyclicality of the oil and gas industry.
What does that mean? Well, in the year 2000, the share price was over 600p, and it’s below that today.
That’s why I prefer defensive businesses for my dividend-paying investments, such as Coca-Cola HBC, National Grid, and Unilever.
So, for the time being, I’m in no hurry to buy BP shares, despite the company’s high dividend yield and transformation prospects.
