It seems barely yesterday that BP (LSE: BP) was a pariah polluter whose days were numbered, and its share price was down in the dumps. But last year, the oil giant rewarded shareholders with a 4.8% dividend yield. And forecasts are predicting 5% by 2023.
BP chose the pandemic dip to announce its plans to become a net zero company by 2050 at the latest. And that was the last straw. The days of oil, and of BP, were surely over.
So is this a comeback for the hydrocarbon energy business? And can we trust that mooted 5% dividend yield? Well, a look at the BP share price over the past couple of years does suggest it’s back in favour with investors.
Don’t be hasty
But it’s way too soon for me to crow over the thought that investors got it wrong, that the BP share price has recovered since its big dip and the dividend yield has come storming back. That’s not least because I didn’t exactly get it right myself, and I didn’t buy in the dip.
And there’s also the price of oil itself, which was boosted big time by the events of 2022. At the turn of the year, nobody expected a Russian invasion of Ukraine, a global supply chain upheaval, or an energy crisis.
So what’s the likely long-term level for oil prices, and could a 5% BP dividend yield really prove sustainable?
Trying to guess at oil prices would be a mug’s game, and I’m not even going to try. I would never have guessed oil would dip below $20 during the pandemic crash. Or that, very briefly, some suppliers whose storage facilities were filling up would even pay people to take the stuff.
And I certainly didn’t envisage a barrel exceeding $120 in 2022. But the long-term BP dividend is surely not dictated by the oil price anyway.
I think it’s very likely the current 5% forecasts will come good and BP will be able to pay that, for a while anyway. But in the long term, it’s got to be all about generating steady cash flow from renewable energy sources.
I rate BP as among the best placed companies to exploit alternative energy opportunities. It has the cash and infrastructure that smaller firms can only dream of. In fact, I reckon the best outcome for some of today’s hopefuls is that they’ll be bought out by the likes of BP.
But all of this is going to need a lot of capital expenditure by BP. And the pressures to make the transition can surely only increase.
So I’m reasonably comfortable in trusting the BP dividend for the next two or three years. But I don’t have sufficient clarity of where the cash to pay it will come from in 10 years, or in 20.
The depressed BP share price has often tempted me. But I’m going to stick with companies whose business is not changing radically.
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Alan Oscroft has no position in any of the shares mentioned. 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.