BP: Strong Earnings Growth Through Dividends

BP (BP), a US$143.3B firm, operates in two distinct business segments: Exploration and Production Segment and Other Businesses and Corporate which includes Alternative Energy, Emerging Consumer Marketing Unit and Shipping Business. BP has significant proven resources across twenty nine countries:

It has posted total sales of US$288,951M in FY07 compared to US$270,602M in FY06. Total profit stood at US$21,169M profit in FY 07 compared to US$22,286M FY07. BP realized strong refinery and marketing margins in FY07 but could not translate that to bottom line growth. The chief reasons were lower reported production volumes, higher taxes in Alaska and higher cost due to sector specific inflation. The chart below depicts its revenue, BIT and profit over last five years:

BP would interest those investors who want earnings growth through dividend distributions. Total dividend paid in 2007 was US$8.1B, compared to US$7.68B in 2006. The dividend per share was 42.3 cents, an increase of 10% compared with 2006. BP ROE stood at 22.37%, with the last five years' ROE averaging at 23.3%. In the current economic condition, BP could be a good dividend stock.

Total long term debt stood at around US$31B, compared to US$24B. Net debt over net equity is around 23%, which aligns with BP’s financing philosophy aim of 20%-30%. Further important financial ratios are below:

Key Challenges in 2009:

• Forecast global oil demand has been revised down and global GDP growth is estimated to be at +2.1% in 2009, 0.8% below the previous estimates.
• Oil product demand in NA shrank by 5.7% year on year in September, which will hurt future earnings.
• Sector Inflation: The estimated exploration and development cost rose by 29% in FY06 and it will have an impact on the bottom-line going forward.
• Increasing capital spending will tighten safety standards across the Group’s Operation will result in increased expenses.

BP’s PEG ratio will vary between .99 and 1.4 assuming earning growth falls between 6%-4% bands in FY09. With current PE 5.46 and BV at 30.23, I believe it is a good price to go long on this stock.

Disclosure: I do not have any position in BP.

Comments

[User 283977:]

Good analysis... buy at 45 and get a 7.4% yield from a solid company.

2008 Dec 10 11:22 AM

[tk77mann:]

Doesn't the writer mean "Strong Income Growth through Dividends"?

2008 Dec 10 11:53 AM

[long_on_oil:]

I have owned BP since 2001 when it paid a dividend of approx. 4% and stock was selling for about $37. Those same shares now receive a dividend of over 9% and the price has seen the 70' s several times. If you want good solid dividend income, this is the stock for you. Let the dividends purchase additional shares and you will not be disappointed. It feels good to know that the dividend checks are buying more shares when the price is down. I have never lost one nights sleep owning BP.
If you go back to 1996 it is even better because you would have gone through two 2:1 stock splits.
When you look at the percentage of dividend payout compared to income, the dividend appears safe for many years to come. My guess, and it is purely a guess, is that the dividend will hit $4 by the end of 2010 and on and on and on.

2008 Dec 11 08:55 AM