BP dividend hopes in the balance

BP’s Barry-battered quarter makes dividend hikes more iffy

Dividend disappointment

BP shares extended their Tuesday decline to as much as 3.4% earlier, on confirmation that a dividend raise was off the cards for the immediate future. Nor does the £101.5bn group foresee a scrip dividend in the near future, ruling out a flexible payment that can be taken as cash or stock. These place a lower burden on cash flow, so BP damping even scrip expectations shows a definitive aversion to higher returns for now. The pay-out let-down caps off a disappointing quarter all round for BP holders. The group posted better than expected adjusted net profit of $2.5bn, well above the $1.66bn median forecast. But the news comes after major investors had cut estimates some 35% over the last three weeks, according to Bloomberg consensus data. The beat, representing a 40% year-on-year drop, remains a disappointment.

Mixed details

Details below the headlines were mixed. Upstream earnings were hamstrung due to Hurricane Barry, which crimped production. Weak prices also weighed. As well, the gearing issue looks set to return to full-blown bugbear status. Leverage has broken back above the group’s 20%-30% target range. (BP uses this formula: debt divided by debt plus equity.) The coming end of the asset disposal programme may help. However, the sale of non-core assets as well as the conclusion of asset sales have now both been touted as a means of reducing leverage. Some investor scepticism is understandable.

Outlook

Further out, the end of seasonal maintenance and “turnaround activities” are expected to give new CEO Bernard Looney, who takes over in February, a head-start for the quarter that will be reported early in that month. So far though, investors aren’t crediting the incoming chief’s production prospects much. BP’s lower than peer group distribution of cash flow to shareholders – 21% vs. around 30% disbursed by close rivals – may help account for the truculent price action. Before the group can turn the pay-out spigots wider, it will need to stabilise debt and a have confidence that it can maintain its higher-than-average investment ratio. In Q3, cash generation matched the $6bn of Q3 2018. Absent further shocks, Looney may have more leeway on pay-outs in Q4. But it could be a tense wait.

Chart points

• BP shares clearly reached a cycle peak in April and have mostly cohered within a falling trend line since then
• Corroboration of the falling trend comes from the collapse below the 200-day moving average at the end of the July and confirmation that the trend had switched from support to resistance following two-consecutive daily failures to get back above it in mid-September. Also note the confluence with the falling line mentioned above
• Still, support close to 480p has now persisted since the beginning of the year. If Monday’s downdraft reaches there, the stock could well find a floor at that level again. More confluence with a rising line springing off August 2016 lows backs the prospect of reasonable limits for current selling
• However below current structures, next theoretical supports could lie all the way down at kick February/March 2018 back lows around 454p-456p

BP Plc. CFD – Daily [29-10-2019, 13.17 GMT]

Source: City Index