BP Stock: Big Dividends and Cash Flow

Since I began writing finance articles in 2011, a few opinions of mine have received outsized criticism. Anything relating to gold or tobacco, and anything relating to BP’s merits as an investment after the oil spill.

My view was, and remains, that BP stock has been disproportionately lambasted as a long-term investment after the oil spill due to its dividend cut, high litigation costs, and stagnant stock price over what was an oil spill that occurred over a decade ago.

Amidst BP’s criticism is the fact that it is an enormous company that sells $304 billion worth of energy-related products per year. It is massive. It earns annual profits equal to half the market capitalization of Hershey each year. Thinking about that–if all Hershey stock were available for sale at the current price every day for the next two years, BP would be able to purchase the company outright with its cash profits (if oil stays above $50 per barrel) by February 20, 2021. We are talking about a firm with deeper pockets and more vast operations than all but a dozen or two in the entire world.


Even though BP is often regarded as the schmuck of the oil majors due to regular asset reshuffling in the $5-$15 billion range and the fact that dividend cuts with no minimal stock price appreciation have been a part of its past twenty-year investment profile, there is more to see than meets the eye.

BP has $61 billion in debt. That is not nearly as bad as it sounds for three reasons: (1) it is sitting on $26 billion in cash; (2) much of the debt is delayed with maturities between 2025 and 2037, almost all at interest rates below 3% such that BP’s long-term interest expenses are less than $2 billion, and (3) BP aggressively depreciates its oil equipment, such that it is receiving over $26 billion in cash flows but net profits are only stated as $11-12 billion because $14-$15 billion is being depreciated.

From 2014 through 2017, BP’s cash flows barely covered the dividend due to low oil prices. It was hard to get ahead and knock down the debt when all your cash is being sent to shareholders. That is why the quarterly payout was frozen at $0.60 per share from the end of 2014 through the beginning of 2018. It wouldn’t be prudent to raise it since the dividend left no room for reinvestment, and heck, it probably should have been cut, but management probably made the decision that shareholders had been through enough and it didn’t to deal with the fallout that GE shareholders experienced after their multiple dividend cuts.

Since 2011, each share of BP has generated $17.82, assuming no dividend reinvestment. With dividends reinvested, the low share price has been a friend, as each share would have generated $23.42 in cumulative dividends amidst a rising share count. At the time of reinvestment, the typical reinvestment price has been $37.54, giving investors 100 shares of BP in 2011 approximately 164 shares today.

Right now, BP trades at $42.57. The stock traded at $42.57 at some point in 2011. What if you bought the stock then, especially in a tax-advantaged account? You’d be sitting on 164 shares, turning $4,257 into $6,981. You would compounded at a rate of 6.4%. That is not bad for a stock that encountered a $20+ billion settlement and two oil bust cycles during our examination period.

And, of course, the effect of past dividend reinvestment can be heavily influenced by a change in the share price. What if BP rises in value to $60? Well, all of those 60 shares that got created at a reinvested price in the upper $30s come along with you. Under that scenario, you’d end up with $9,840 in value for a compounding rate of 11.04% that would beat the market.

I don’t the typical investor is thinking “If BP goes up from $42 to $60, the investor that bought in 2011 and reinvested along the way would have beaten the S&P 500 by almost two percentage points dating back to 2011.” Some of these high dividend-paying stocks that don’t appear to go anywhere can create a lot of wealth for the reinvestor with moderate-looking upticks in price over time.

My view is that BP remains a generational holding. It earns $1 billion in net profit per month. The real cold hard cash coming into headquarters is actually more than $2 billion per month, subject to depreciation which is eventually reckoned with by a corresponding capital expenditure. A day will come when BP stock will trounce the market for investors that bought the stock during the 2011-2019 stretch and reinvested because so many additional shares have become embedded into the holding.

It is a business that earns more cash than you might think, is not as leveraged as you might think, and will be around half-a-century from now. My guess is that BP will be the unusual investment where huge cash dividends and the occasional dividend cut will be a part of the investor’s story, but for the investor with a lifetime horizon, it’s the kind of stock that will pay for itself in dividends every 12-17 years.

I don’t think it would become one of my top investment ideas for prospective purchase unless it was trading at $34 per share or lower, but that is mostly because I’m setting the high handicap of posing the question: “When does BP stock become the most attractively priced stock of all known opportunities?” For someone who owns it and is sitting back collecting cash, it really is your own oil well. Even if you buy the stock today, it only takes six dividend payments over the next year and a half for you to get a tenth of your investment back as your share of cash profits from the oil giant. For those who prize drowning in cash dividends, BP continues to return gobs of income over the full course of a business cycle relative to the amount of capital that an investor puts into the stock.

Liked it? Take a second to support The Conservative Income Investor on Patreon!