Should you buy BP for its dividend after full-year results?

BP(LSE: BP) and Royal Dutch Shell are two of the most popular dividend stocks in the FTSE 100. Last week, Shell reported its full-year earnings and confirmed that it will be paying another big dividend for the year. Today, it's BP's turn to report. So let's take a look at the numbers. Is BP worth buying for its dividend with the oil price rising?

Full-year results

Today's numbers are a vast improvement on last year's figures. The oil major reported Q4 underlying replacement cost profit (its definition of net income) of $2.1bn, beating analysts' estimates of $1.9bn. For the full year, the figure was $6.2bn, up from $2.6bn in FY2016. Full-year production increased to 2.5m barrels per day, a 12% increase on last year.

Chief Executive Bob Dudley was extremely upbeat about the results, commenting: "2017 was one of the strongest years in BP's recent history. We enter the second year of our five-year plan with real momentum, increasingly confident that we can continue to deliver growth."

Steady dividend

Turning to the dividend, BP held its Q4 payout at 10 cents per share, taking the full-year payout to 40 cents per share. At the current share price, that's a yield of a high 6%. Is that dividend sustainable?

Looking ahead to FY2018, the current consensus dividend estimate is 39 cents per share. That suggests some brokers believe the oil giant will cut its dividend this year. Is that a possibility?

Strong cash flow

Personally, barring another oil price collapse, I believe the chances of BP cutting its FY2018 dividend are very low.

Sure, dividend coverage still looks worryingly thin. BP generated underlying replacement cost profit of just 31.3 cents per ordinary share, resulting in a low coverage ratio of just 0.8 for FY2017.

However, with the oil price having rebounded significantly from its 2016 lows, cashflow is now sufficient to cover the dividend. Operating cashflow (excluding Gulf of Mexico payments) was $24.1bn for the year, up from $17.6bn in FY2016. This level of operating cashflow exceeded organic capital expenditure, cash dividend payments to BP shareholders and share buybacks by $1.1bn.

Break-even price

Furthermore, BP has advised that its current break-even oil price - the price needed to cover capital expenditures and dividends - is around $50 per barrel. So with the price of Brent Crude in the high $60s right now, BP is sitting comfortably. Having said that, the company is looking to drive its break-even price lower, to around $35-$40, to allow more margin for error.

With the oil price back up near $70 per barrel, I can see the appeal in owning BP shares for the big dividend yield right now. The stock is far from what I would consider to be the perfect dividend stock, as dividend coverage is low, and we may not see any dividend growth for a while. However, in the current low-interest-rate environment, in which savings accounts are only paying 1%, a 6% dividend yield does look appealing.

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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. 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.

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