BP Dividend Hit 6.5% Yield, Still Best Avoided

With the stock down 15% in the past 3 months, BP’s (BP) dividend has spiked to historic highs. At 6.5%, Royal Dutch Shell (RDS.A) is the only major oil company with a higher yield at 6.9%. Exxon (XOM) and Chevron (CVX) meanwhile both have dividends under 5%. Is BP an attractive buy for income investors? BP shares have still not recovered from the trough levels hit during the 2010 Horizon Deepwater oil spill in the Gulf of Mexico.

Despite a temporary dividend cut during the oil spill crisis, BP has proven that it can manage oil bear markets and still shell out a nice enough dividend. In the early 2000s, when oil prices were under pressure, the company was able to maintain a stable payout with a yield reaching nearly 4%. Post oil spill, BP grew its dividend by 8% a year to revert back to pre-crisis levels incredibly quickly. Regardless of BP’s willingness to support a dividend, maintaining its current payout is still reliant on an ample amount of free cash flow. Although it’s tempting to buy one of the world’s bigger companies at a near 7% dividend, it’s unlikely payments will stay that high for long. With few expense-cutting options and a free cash flow deficit when subtracting dividends, BP will have to make a dividend cut decision soon should oil prices stay where they are.

Source: Guru Focus

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