Are BP plc and J Sainsbury plc good dividend stocks?

Edward Sheldon analyses whether oil major BP plc (LON: BP) and supermarket J Sainsbury plc (LON: SBRY) are good stocks for income investors.

| 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.

When analysing dividend stocks, not only is it important to look for a high yield, but also to consider dividend sustainability and growth. By sustainability, I’m referring to whether the company can afford to pay its dividend and whether there’s a chance of a cut in the future.

In relation to growth, ideally I like to see a pattern of consistent growth in the past and prospects for it going forward. A growing payout is considerably more valuable than a flat one as it means investors don’t lose purchasing power to inflation. Today, I’m looking at both BP (LSE: BP) and J Sainsbury (LSE: SBRY) and examining their dividend prospects.

6.2% yield 

BP paid out 40 cents per share in dividends last year, which at the current share price and exchange rate is an appealing yield of 6.2%. While that’s an attractive rate, especially in the current low interest rate environment, I’m not convinced that BP is an excellent dividend stock right now.

An examination of its dividend track record, reveals that the company has paid out the same 40 cents for two years now. Looking ahead, City analysts don’t expect any growth this year or next. That’s clearly not ideal from an income investing perspective. Inflation is currently running at around 2%-3% per year in the UK and that means the purchasing power of BP’s dividend is diminishing over time.

Looking at the payout sustainability, the picture doesn’t look great either. The oil price decline has taken its toll on profitability at BP in recent years. Analysts expect the oil major to generate earnings of 30 cents per share this year. That’s a long way short of the expected payout of 40 cents, and not sustainable in the long term.

Having said that, BP has reduced its operating costs so that the oil price needed to cover its cash expenditures and pay the dividend is now just $49 per barrel. With oil prices hovering in the low $60s at present, the dividend looks sustainable, for now.

Overall however, I believe there are other better dividend stocks in the FTSE 100 right now.

Competitive landscape

Another dividend stock I wouldn’t buy today is J Sainsbury. While the supermarket sector was once a fertile hunting ground for UK income investors, the landscape has changed considerably in recent years.

Indeed, the aggressive approach of the German discounters Aldi and Lidl has made life very difficult for the traditional UK supermarkets over the last five years. And this has been reflected in Sainsbury’s profits and dividends. After paying out 17.30p in dividends in 2014, the supermarket has since paid its shareholders 13.2p, 12.1p and 10.2p. That’s an ugly trend. Furthermore, in its most recent half-year results, released earlier this month, the group cut its interim dividend to 3.1p from 3.6p last year. City analysts expect a full-year payout of 9.8p, which is a yield of 4.3% at the current share price.

Its cash flow looks to be enough to cover the dividend payments. For the recent half year, dividends paid of £144m were covered 3.4 times by free cash flow. And dividend coverage is anticipated to be a healthy 1.9 times this year. However, despite these positives, again I believe there are better FTSE 100 choices out there. 

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.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »