BP (NYSE: BP) continues to face a host of legal problems, despite it being nearly three and a half years since the Deepwater Horizon oil spill. Its two biggest pending issues are the business economic loss claims settlement and the fines for violation of the Clean Water Act. Some estimates for the business claims top $16 billion. Additionally, US authorities are aiming for $18 billion in fines for violation of The Clean Water Act. Then there's another $34 billion on top of that individual states are suing for. Investors seem to have completely dismissed these as a problem.
Dividends and book value tell another story
BP, ExxonMobil, and Chevron all trade with similar forward estimated PEs of 9-10. All three have raised their dividends per share by around 30% over the last two years. According to the numbers, all three companies and valuations appear to be similar with two exceptions: dividend yield and price-to-book value.
BP has a 5.1% dividend yield compared to around 3% for its two larger peers. It also trades just a tad over book value while Exxon trades at around 130% higher than book value and Chevron around 70%.
Is BP writing checks it can't cash?
BP's dividend yield is simply unusually high. If the market was as confident in BP's dividend as it is in Exxon or Chevron's dividend, it too would have around a 3% yield and trade around $72 per share. Instead it's closer to $42 per share. Perhaps the market really does know best.
If you reduce BP's shareholder equity by the potential of $16 billion (for the settlement) plus $18 billion (for the Clean Water Act fines) and $34 billion for the suits by the individual states,then BP trades around double its book value, more in line with its peers. Up to $68 billion is a serious chunk of change even for BP. That would bring BP's yield down to 2.8%, also more in line to its peers.
The bigger risk
BP has continuously under-budgeted its legal problems so I wouldn't be surprised if the market is wrong and the dividend takes at least a bit of a cut. . In 2010 it took a $40.9 billion charge, cut the dividend entirely, and sold $30 billion in assets. While I certainly am not expecting the entire dividend to be cut, it does appear that BP is being too optimistic with its current dividend policy. Given that risk, I believe Exxon and Chevron are the safer and yet better bets over the next five years. The Foolish bottom line is all three have similar earnings power versus their stock prices currently, but Exxon and Chevron comes with a dividend that you can rely on. Exxon and Chevron each have long histories over 10 years of continuous dividend payouts that only increase. BP has cut its dividend before, and it's certainly possible it could do so again.
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