When theoil price crashed, BP (LSE: BP) boss Bob Dudleyreckoned we could be in for an extended period of low prices, butBPcommitted itself to keeping itsdividendgoing.
In fact, the dividend has been maintained at yields of 6% and better, and if it turns out as expected this year and next well be seeing it exceed7%. And who wouldnt want a pieceof that? Well, with oil prices stubbornly remaining in the $50-$55 per barrel range for the past 12 months (when a number of commentators had suggested we could be back to $60-$75 by the end of last year), scepticism is growing.
The BP share price has been remarkably resilient through it all. Despite ups and downs, over the past five years its put on 18% to todays 473p level. And though thats lagged the FTSE 100, if we add around 30% in dividends over the period, its actually provided a pretty reasonable overallreturn.
But BP is very much an income stock rather than a capital growth stock, and were increasingly hearing claims that the dividend is coming under pressure. If its cut, confidence will surely be shattered and Id expect the share price to crumble.
Top fund managerNeil Woodford is one of those who believes that BPs dividend, along with that from Royal Dutch Shell, is unsustainable. Despite years of falling earnings, which only reversed last year, Shells dividend has also remained high and yielded 6.2% last year, with better than 7% on the cards this year and next.
With the dividend payments coming from cash reservesin a period that has seen massive asset disposals and high debt levels,Mr Woodford has said: In effect, these companies are liquidating themselves rather than facing up to the need for a dividend cut. Theres little doubt that hes right on current finances, but the real questions arewhether such a strategy over the short termis justified against a longer-term view and whether earnings will recover sufficiently to cover dividends with some degree of comfort.
Forecasts suggest BPs dividend for this yearwill still be uncovered, though for 2018 wed be looking at earnings coming in a little ahead of the predicted dividend technically covered, but nowhere near a sustainable level yet.
Back to growth
At final results time for 2016, Bub Dudley still showed his characteristic optimism, saying, among other things: Weare well prepared for any volatility in oil pricing,with costs cut significantly. He added: We have laid the foundations for BP to be back to growth.
The Deepwater Horizon financial hit is pretty much in the past now, and BP is back in the game of increasing its gas and oil interests.
And in a strategy update in February, BP spoke of cash flow growing materially, with upstream production growth forecast at around 5% per year until 2021. And crucially, the company put its expected cash balance point as low as $35-$40 per barrel by 2021.
If the dividend was going to be cut it would have happened during the tougher times, and I really cant see it now that BP is past its nadir and looks set for a return to earnings growth. I really do see 500p per share as being on the cards, possibly before the end of the year.