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When it comes to income investing, the dividend yield is a key part of the equation. It’s an easy way for people to compare one stock to another. An increase in the yield often makes it more attractive to consider buying, although it shouldn’t just be taken in isolation. Here’s one FTSE 100 idea that has caught my eye recently.
Reasons for the stock fall
I’m talking about BP (LSE:BP). The stock is down 30% over the past year, with the dividend yield sitting at 6.6%. The yield has increased by just under 50% over this time period.
Results from earlier this week for Q1 showed a 49% year-on-year drop in adjusted profit to $1.38bn. Needless to say, this was worse than analysts were expecting. Interestingly, this was the third time in five quarters that the business had missed forecasted numbers. This decline was primarily due to challenges in the gas trading market and lower crude oil prices.
Aside from the short-term drop, the company has struggled over the past year with strategic uncertainty. It has faced criticism for shifting strategies, particularly its retreat from renewable energy investments. The departure of the head of sustainability strategy, Giulia Chierchia, along with news that she won’t be replaced, hasn’t helped.
The dividend outlook
Given that the quarterly dividend per share of $0.08 hasn’t changed for several quarters, the increase in the dividend yield has come purely from the falling share price. This isn’t a great sign, even though it may look more attractive, because it’s not driven by higher dividend payments.
The risk here is that BP cuts the dividend in the future to preserve cash. With the company’s net debt rising to $27bn, this isn’t an unrealistic concern going forward.
However, the dividend cover is still at 1.3. This means the current earnings can completely cover the dividend declared, with surplus left over. The announcement in February of “a fundamental reset of our strategy” also means that action is being taken to improve the company. In theory, over time this should filter down to higher profits. Some of this should then be paid out in the form of dividends.
A stalwart but not growing
BP has a proud history when it comes to dividend payments. It has paid a consecutive dividend for over two decades. I don’t expect this will change, even with its difficulties in trying to identify which strategy to pursue. However, I do think that if finances don’t improve, the dividend might not increase from current levels for some time.
On that basis, the jump in the dividend yield is a bit misleading. I think investors can find better options for income shares that are trending higher and paying out more due to bumper profits.
This story originally appeared on Motley Fool
