BP has a Dividend Safety Score of 9, suggesting that the company’s dividend is much riskier than most dividend stocks; thanks to several negative factors.
Among the most important is BP’s weak balance sheet. The oil industry is incredibly capital intensive, meaning that absolute debt loads are generally high across all integrated energy producers. However, compared to peers such as Exxon and Chevron, BP’s debt load of $55.7 billion is higher and more dangerous, limiting its financial flexibility during industry downturns.
Source: Simply Safe Dividends
As you can see below, BP’s leverage ratio, interest coverage ratio, and debt / capital ratio are all far worse than either its large rivals or the industry average. This also explains why it has a worse credit rating than Exxon, Chevron, and Shell.
| Company | Debt / EBITDA | EBITDA / Interest | Debt / Capital | Current Ratio | S&P Credit Rating |
| BP | 6.46 | 7.71 | 33% | 1.25 | A- |
| ExxonMobil | 1.40 | 109.23 | 13% | 0.89 | AA+ |
| Chevron | 2.55 | 192.00 | 20% | 1.30 | AA- |
| Royal Dutch Shell | 3.96 | 10.44 | 28% | 1.10 | A |
| Industry Average | 3.03 | NA | 29% | 1.13 | NA |
Sources: Morningstar, FastGraphs, Simply Safe Dividends
Given such a high debt load, the risk of potentially rising interest rates, and an industry as cyclical and unpredictable as oil, the current dividend cost of $5.5 billion per year may not be sustainable for much longer.
After all, BP has been willing to take a credit downgrade in February of 2016 (1), caused in large part by its defense of its payout. Further downgrades would mean much higher debt refinancing costs going forward, so management can’t allow its credit ratings to drop much further before it begins to threaten the company’s future long-term growth prospects.
The slump in energy prices has hit BP’s business hard. Sales growth has been less than -20% year-over-year for seven straight quarters. As seen below, annual free cash flow per share slumped to just 51 cents last fiscal year, and the business isn’t generating positive free cash flow today.
Source: Simply Safe Dividends
As a result, the company’s payout ratios (2) have spiked to unsustainable levels, which require BP to raise debt, sell assets, and burn through precious cash on hand to continue paying dividends.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
You can see that BP’s leverage has increased over the past decade, giving it less flexibility to weather the current storm.
Source: Simply Safe Dividends
Overall, in my opinion, BP’s dividend has high risk of being cut if oil prices don’t begin a meaningful recovery in the near future. The nasty combination of high financial leverage, negative free cash flow, a deteriorating credit rating, capital-intensive operations, and dependence on unpredictable commodity markets make BP a risky business to invest in.
