What BP’s dividend cut and a shift to renewables means for investors
Oil giant trims shareholder payout by half, but its plans for a greener future still appeal, finds Sam Benstead
BP has added its name to the list of income giants slashing dividends but the decision has sent its share price higher and makes the business a better investment proposition, experts say.
The oil megalith will now pay a dividend of 5.25 cents per share, a 50pc cut, and has said it will “reset” its shareholder payouts to this new, lower level for the foreseeable future.
However, its shares still yield a generous 6pc, which – on top of ambitious plans to transition to a carbon-neutral company – make it worth buying, according to stock analysts.
The last time the company cut its dividend was in 2010 after its Gulf of Mexico oil spill. However, it temporarily suspended the entire payout rather than resetting it
Despite the disappointing news for income investors, BP’s share price has risen 7pc given that the cut was in line with expectations and its financial results were more positive than expected.
Income investors will still be left reeling, however. BP is the second most-held stock for users of broker Interactive Investor, only behind banking giant Lloyds.
But they should be buoyed by the news none the less. Mark Nelson, of wealth manager Killik & Co, said BP’s results were positive in the face of the extremely challenging economic backdrop.
“Although the second-quarter loss was significant at $6.7bn (£5bn), it was smaller than expected as oil trading results were extremely strong,” he said.
Nicholas Hyett, of Hargreaves Lansdown, said it was a further blow to income investors but necessary to preserve cash and fund the shift from fossil fuels to renewables.
“Results come alongside a major rethink of its business and a move away from oil. The focus is now on getting the most out of its remaining oilfields while investing in a low carbon future,” he said.
Helal Miah, of broker The Share Centre, said BP was worth buying due to its high yield and the positive outlook for its renewable energy business. Interactive Investor’s Richard Hunter agreed and said BP’s 6pc yield is particularly punchy in the current low savings rates and low yield environment.
“The yield is particularly attractive to income-starved investors when set against the number of FTSE 100 businesses that deferred or cancelled dividends,” he said.
Nelson said any increase in shareholder returns would now come via share buybacks when the company has appropriate cash flows, with BP unlikely to reinstate its former dividend any time soon.
In light of BP’s cut, Link Group, a data company, forecast dividends for British stocks will drop by 38pc to around £60.5bn this year, as a best-case scenario. It would drop by 42pc in the worst case.
British stocks are expected to yield 3.6pc in this best case and 3.3pc in the worst case. The longterm average is 3.5pc.
The oil sector is now responsible for £2.2bn of dividend cuts since the end of March – with banks the only industry that has chopped more.
Financial businesses were told by the Bank of England to halt shareholder payouts to ensure they had enough cash to support lending to companies. They could be allowed to payout again next year.
‘Market consensus of BP as a buy showed optimism in its ability to stay relevant in a new energy future’
A green revolution?
Amid the dividend cut, BP laid out a plan to transition to a “carbon neutral” company by 2050 and pledged to increase low carbon investments by 1,000pc by 2030.
Investments are expected to include renewable energy, bioenergy, hydrogen and carbon capture, utilisation and storage.
Nelson said: “The company, more than any within the oil sector, has used the crisis as an opportunity to reset and reposition its business to one which can participate in, rather than be left behind by, the energy transition. We continue to rate BP shares as a buy.”
Hunter added that while the road ahead may well be rocky, BP is transforming parts of the business.
“The market consensus of BP as a buy showed optimism in its ability to maintain relevance in what could be a new energy future,” he said.
Greenpeace has called on BP to halt drilling for new oil as it transitions to renewables