Why It Might Not Make Sense To Buy BP p.l.c. (LON:BP.) For Its Upcoming Dividend

It looks like BP p.l.c. (LON:BP.) is about to go ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, BP investors that purchase the stock on or after the 7th of November will not receive the dividend, which will be paid on the 20th of December.

The company's next dividend payment will be US$0.08 per share. Last year, in total, the company distributed US$0.31 to shareholders. Last year's total dividend payments show that BP has a trailing yield of 6.5% on the current share price of UK£3.782. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether BP has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for BP

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. BP distributed an unsustainably high 187% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while BP's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. BP's earnings per share have fallen at approximately 18% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. BP's dividend payments per share have declined at 1.7% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Has BP got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 187% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think BP is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering BP as an investment, you'll find it beneficial to know what risks this stock is facing. For example - BP has 3 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.