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BP’s Yield Offers ‘Opportunity’ as Top Kill Starts

BP Plc’s market-leading dividend yield make the shares a buy as the oil company attempts to plug the Gulf of Mexico spill that cut the stock price by a quarter, analysts said.

BP offers a ratio of dividend to share price of 8.4 percent, the highest among 18 peers and more than the 6.1 percent for Royal Dutch Shell Plc, the company’s closest European rival, according to Bloomberg data. BP is down more than 20 percent since the blast on Transocean Ltd.’s Deepwater Horizon rig that killed 11 workers and triggered the leak.

BP rose the most in more than a year today after the U.S. Coast Guard said the top kill technique was having some success in stopping the oil and gas flowing into the Gulf by plugging the well with heavy drilling liquids. BP Chief Executive Officer Tony Hayward has promised to clean up “every drop” of oil, an effort that’s costing his company about $22 million a day.

BP’s stock drop “is a fantastic opportunity to buy a very high quality long-term business on a very cheap rating,” said Tom Nelson, an analyst at Guinness Atkinson Asset Management in London. “Tony Hayward will fight tooth and nail to protect the dividend.”

BP advanced 5.9 percent to 520.8 pence in London. That compares with a year-to-date high of 655.40 pence on April 20.

BP had free cash flow of $3.4 billion in the first quarter and made a record $6 billion in profit on $73 billion of revenue. It has maintained the dividend at 14 cents a share for five quarters.

Debt, P/E Ratio

Hayward reduced the company’s net debt ratio to 19 percent in the first quarter from 23 percent a year earlier, and the company has a AA credit rating from Standard & Poor’s. The price/earnings ratio is 6.6. That compares with 10.7 for Shell and 13.3 for Exxon Mobil Corp., the world’s biggest energy company.

“Financially, they’re strong enough” to cope with the costs of the spill, Brian Gibbons, an analyst at CreditSights Inc. in New York, said in a Bloomberg Television interview yesterday. “It’s a buy at these levels.”

Gibbons estimates that the response costs will total about $5 billion this year. Sanford C. Bernstein Ltd.’s Neil McMahon, who has an “outperform” rating on the stock, said that total liabilities from the spill may exceed $8 billion.

Hayward will be able to defend the dividend with the company’s cash, by selling some assets or by taking on more debt, Gibbons said.

Gilt Yields

The dividend yield for BP, Britain’s biggest company after HSBC Plc and a staple stock of the country’s pension funds, is now more than twice the 3.5 percent yield on 10-year U.K. government bonds.

Prime Minister David Cameron is fighting to shrink the budget deficit of about 12 percent of gross domestic product this year, bigger than Greece, Italy and the U.S., according to European Commission forecasts.

“The yield on BP has grown considerably more than its peers,” said David Hart, an analyst at Westhouse Securities Inc. in London. “The market may have sold it off too much. But the dynamics of the situation will change a lot if top kill doesn’t work.”

Hayward said the chances that top kill will succeed are between 60 percent and 70 percent. The procedure may take two days to complete and has never before been attempted at the depths of this well, 5,000 feet (1,524 meters) under water.

“If top kill doesn’t work, the stock will continue to decline,” Philip Weiss, an analyst at Argus Research Corp. in New York who has a ‘hold’ rating on BP, said in a Bloomberg Television interview. “If it works, it could be a benefit.”

In a Bloomberg survey of analysts, 34 have a ‘buy’ rating on the stop, with eight ‘holds’ and one ‘sell’.

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