Question

The stock prices of energy companies have tumbled (mainly because of a collapse in energy prices) to lows we haven’t seen in years. As a result the dividend yields of these companies have skyrocketed. BP, as of today, is paying greater than a 10 percent dividend to its shareholders. Exxon and some other major oil companies have similar dividend yields. This can be lure to investors because of a very low interest rate environment, a risky stock market (at the moment), etc. Question: should investors be worried about these high dividend yields? How likely is it BP will maintain its high dividend yield given the current situation with the economy and energy prices? Does BP's financial statements offer a clue?

Answer 1

Yes, investors should be worried about high dividend is because it is reflecting that the company is a highly mature company and it does not have enough projects to reinvest its profits and it is trying to take out its profits highly to the investors so Investors should be sceptical about the growth of the company which is not visible in future.

BP can only manage its dividend yields which is very high given the current situation and decrease in the energy prices by paying out its cash reserves to the shareholders and it can also pay out more of its profits.

Financial statement of the company is also offering a clue that company does not have much projects to invest into in future and the company is trying to pay out its all profits to the shareholders of the company so they do not have enough projects to reinvest. It can also be estimated that these companies have a higher amount of cash reserves and they are paying out on their cash reserves in form of dividends in order to help the shareholders because they believe that share holders are going to earn a higher rate of return than Company.