A Closer Look at BP's Dividend Potential

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  (LSE: BP  ) (NYSE: 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'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 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

BP currently changes hand on a P/E rating of 8.6 for 2013, comfortably below the comparative readings for both its oil sector counterparts as well as the FTSE 100. It does not yield as much as its oil rivals, however, but the massive price variance more than compensates in my opinion.

Although the travails owing to the Gulf of Mexico disaster look set to rumble on, I believe that the long-term future looks good for BP owing to its juicy production prospects. Its catalog of major assets across the globe are set to accelerate group output -- the oil leviathan switched on five major projects last year, is set to bring another four online in 2013 and an additional six in 2014 -- and it is making solid progress in both its upstream and downstream activities.

The firm is also handing back plenty of cash to investors in the form of share repurchases, and plans to return around $8 billion to investors over the next 12-18 months. Combined with potentially lucrative earnings catalysts, I believe that BP is an income stock worthy of serious consideration.

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