BP Stock Offers An Estimated 9.4% Annual Total Return To The Dividend Yield Investor – BP p.l.c. (NYSE:BP)

BP‘s (BP) stock offers great value for investors. This energy producer’s dividend yield is 6.45% and its forward price-to-earnings ratio is under 12 times.

That is a great bargain. Moreover, the company appears to be able to afford the high dividend payments that it is making.

For example, in the 12-month period leading up to September 2019, BP generated $25 billion in operating cash flow. Now after all of its net capital expenditures were made using that cash flow, BP still had free cash flow (“FCF”) of $7.6 billion left over.

BP was able to pay dividends and buy back shares. BP decided to pay $6.6 billion in dividends and bought back $356 million of its shares. So in effect, BP had plenty of money to afford its high-yield dividend.

BP Stock’s Dividend in the Last 12 Months

You can see in the chart I prepared below BP has consistently had plenty of adjusted FCF to pay its dividends. Here I have adjusted FCF figures for the sale of assets, which effectively lowered capex and raised FCF.

BP - Adj FCF and Dividend History

Source: Mark R. Hake, CFA

This chart shows that for each quarter looking back 12 months, BP has generated more FCF (in blue) than the dividends it paid (in yellow). That should make investors feel very confident that the present high dividend yield is sustainable.

Moreover, this was accomplished in a very difficult environment for oil and gas prices. Energy prices are at the bottom of their long-term ranges.

The red line in the chart shows that dividends have actually been growing as well. But no worries. The FCF (in blue) more than covers the dividend growth.

So for BP to produce such FCF and pay dividends through this period without having to increase debt, sell assets or raise equity is a great accomplishment. It lends stability to the BP stock’s high-yield story.

Dividend Growth History

If you look at the past 15 years of dividends at BP, you see that there have been three trends. You can see this in the chart below.

Source: Mark R. Hake, CFA

First, before 2010, dividends per share grew very nicely. But then the Deepwater Horizon tragedy occurred in the Gulf of Mexico. BP cut its dividend dramatically.

After that, the dividend per share rose to higher levels. And it did so fairly quickly. But the dividend only regained about two-thirds of its prior glory.

Then from 2015 on, the dividend per share has increased slowly from $2.40 to $2.46, where it is today. That reflects the time period in which oil has stayed fairly low. Since 2015, the annualized payout has only grown 2.6%.

BP’s Dividend Yield History

It turns out that BP has spent a good deal of the last five years with dividend yields lower than today’s 6.45%. Look at the following chart:

Source: Seeking Alpha

BP’s stock has spent plenty of time in the last five years with a dividend yield below 6% (the dark line across the chart).

In fact, over the past 10 years, the median dividend yield was 5.88% and over the past 5 years it was 6.4%:

Source: Seeking Alpha and Hake calculations

We can use this in the valuation for BP’s stock.

BP’s Future Value

Let’s assume that the dividend continues to show this kind of slow growth, and the annual payout continues to increase by 2.6% per year. By 2024, the dividend per share will be $2.79.

Now assuming that the dividend yield improves a bit, here is what BP’s stock could be worth. Let’s say that the dividend yield improves and reaches 5.88% (the average over the past 10 years) from 6.45% by the end of 2024.

That would mean that BP’s stock would rise to $47.45 by 2024. That is because the dividend estimate of $2.79 in 2024 divided by 5.88% is equal to $47.45.

That represents a price gain of 24.4%.

Source: Hake estimates

Now that is not what BP’s stock is worth today. Let’s say the alternative is a fund that paid at least a 3% dividend or a certificate of deposit with a 3% guaranteed return. That provides us a present value alternative.

The present value factor for a 3% return is 86.3%. So multiplying $47.45 by 86.3% brings a net present value of $40.93. So BP’s stock is worth $40.93 today, given our assumptions about dividend growth and dividend yield.

Source: Mark R. Hake, CFA

This represents a real worth for BP’s stock at $40.93 that is 7.3% higher than today’s price at $38.13 per share.

Total Return Given BP’s Safe Dividends

Here is another way to look at how much investors can expect to make with BP’s stock. Given our calculations above, we can estimate the total return annually.

For example, the price at 2024 year-end will be $47.45 per share. That represents a price gain of 24.4% or $8.32 over that period. That is one part of the total return calculation. The other part is the dividends that will be collected during that period.

Based on my calculations, the total amount of dividends over the five years will be $13.26. This represents, as assumed above, a 2.6% average annual increase in dividends paid out per share.

Therefore, the price gains could be $8.32 per share and the dividends collected will be $13.26. This total of $21.58 per share represents a gain of 56.6% over the next five years.

Source: Mark R. Hake, CFA

Now the annual average total return is equal to 56.6% calculated on a cumulative basis. That works out to 9.4% annually.

So the average annual total return to investors could be 9.4% per year over the next years. This reflects the current 6.45% dividend yield and an estimated price gain of almost 3% per year.

To the defensive investor, that looks to be a pretty good and safe return.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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