BP shares yield 10%, but I’m not buying after Shell’s dividend cut

July 5, 2021 0 Comments

first_img I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Roland Head | Sunday, 3rd May, 2020 | More on: BP Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. See all posts by Roland Head Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. BP shares yield 10%, but I’m not buying after Shell’s dividend cut Roland Head owns shares of Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.center_img Our 6 ‘Best Buys Now’ Shares Simply click below to discover how you can take advantage of this. “This Stock Could Be Like Buying Amazon in 1997” Enter Your Email Address Royal Dutch Shell shocked markets last week with a 66% dividend cut, ending over 70 years of unbroken payouts. The BP (LSE: BP) share price fell after this news too, even though BP had confirmed its payout a few days earlier.Today I want to take a fresh look at BP shares and explain why I’m not buying BP, even though I think its 10% dividend yield could be safe.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…Is BP a better business than Shell?As a Shell shareholder I may be biased. But I really don’t believe that BP is a better company than Shell. In terms of profitability, Shell scores more highly. Over the last three years, the Anglo-Dutch group has generated an average operating margin of 7%. The equivalent figure for BP was 3.5%.In environmental terms, Shell and BP both face big challenges to reduce their carbon footprints while remaining profitable. Both companies also have quite heavy debt burdens and have struggled to deliver reliable growth for many years.However, there could be one reason why BP shares are a better buy than Shell stock.$7 per barrelA simple way to test the affordability of a company’s dividend is to compare it with free cash flow. How do BP and Shell score?According to comments made on BP’s analyst webcast last week, the group’s cash flow breakeven with dividends is equivalent to a Brent Crude price of $35 per barrel. However, the company says that if you exclude the cost of the dividend, it only needs $7 per barrel to achieve cash breakeven.That’s a remarkably low figure. As far as I can tell, it’s one of the lowest in the industry.I haven’t been able to find any comments from Shell providing a comparable figure. But reports I’ve seen suggest that Shell’s cash breakeven point for 2020 is much higher than BP’s.With Brent trading at about $26 as I write, I’m fairly sure BP isn’t generating enough cash to support its dividend. But I think it’s probably getting closer than Shell.Are BP shares a dividend buy?I suspect BP management are holding the dividend because they expect oil prices to rebound later this year. If that happens, then the group should be able to generate enough cash flow to start repaying some of its debt.However, this is a gamble, in my view. BP’s net debt has risen from $45bn one year ago to $51bn today. That’s a lot of borrowed cash for a company that’s only expected to make a profit of $3.6bn in 2020.BP has gambled on the dividend before and won – most recently when oil prices crashed in 2015–16. The company may get lucky again. But although I’m tempted by the 10% dividend yield available from BP shares, I’m not going to buy.The coronavirus pandemic has shown us the importance of strong financial management and long-term planning. In my view, Shell’s decision to cut shows that it’s learning these lessons.I’d prefer to take the pain upfront today and feel confident in the future. BP shares don’t give me that feeling – I reckon shareholders will need to keep worrying about that 10% dividend yield. Image source: Getty Images. last_img read more