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BP plc (BP)’s Potential

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BP plc (ADR) (NYSE:BP)LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of BP plc (LON:BP) and assessing whether the company is an appetizing pick for income investors.

How does BP’s dividend history stack up?

2009 2010 2011 2012
FY Dividend Per Share 56 U.S. cents 14 U.S. cents 28 U.S. cents 33 U.S. cents
DPS Growth 1.6% (75%) 100% 17.9%
Dividend Cover 1.6x n/a 4.9x 1.8x

Source: BP Company Accounts

BP plc (LON:BP)’s dividends have behaved extremely erratically in previous years, particularly after the consequences of the Deepwater Horizon oil spill drove the company into severe losses in 2010 and pulled shareholder payments with it. Dividends have since resumed an upward path despite fresh earnings pressure, with last year’s full-year payout rising despite a 55% collapse in earnings per share (EPS).

Dividend cover has moved wildly during the period, accompanying similar dividend and earnings performance. Last year’s coverage came in just below the widely regarded safety benchmark of two times forward earnings.

What are BP’s dividends expected to do?

2013 2014
FY Dividend Per Share 35.6 U.S. cents 38.1 U.S. cents
DPS Growth 7.9% 7%
Dividend Cover 2.3x 2.4x
Dividend Yield 5% 5.3%

Source: Digital Look. Exchange rate: £1=$1.52118

BP is widely expected to resume earnings growth over the medium term, bucking fresh weakness in 2012, which is predicted to keep dividends rolling higher and push dividend cover back above the security watermark of 2 times. Analysts have penciled in EPS growth of 36% and 12% for 2013 and 2014 respectively.

BP plc (LON:BP) saw profits halve to $11.6 billion last year due to massive asset divestments, the firm still having to build cash to cover the cost of the Deepwater Horizon crisis. The company affirmed in last month’s interims that the total cumulative charge for the incident remained at $42.2 billion, although ongoing legal action leaves question marks over what the final bill could potentially clock in at.

How does BP’s dividend prospects rate against the competition?

Prospective Dividend Yield Prospective P/E Ratio
Oil and gas producers 5.7% 21.7
FTSE 100 3.1% 15.9

Source: Digital Look

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