Wednesday, December 30, 2015

BPCL: A refined dividend play

It has run up nearly 46 per cent over the past 15 months to ₹907. But the dividend yield on the stock of public sector oil marketing company BPCL still works out to a neat 2.5 per cent (based on the Rs.22.5 per share dividend declared for 2014-15). The company has been a regular dividend payer, not missing a beat in 25 years at least. Guess, dividends are a constant when your largest shareholder — the government, in BPCL’s case — is always in need of funds. Over the past few years, BPCL has paid out a moderate 30-32 per cent of its earnings as dividend.

This not-too-high dividend payout ratio provides comfort on the company’s ability to continue paying dividend. BPCL is in a sweet spot, thanks to many factors that have helped the stock run up. Primarily, the pricing reforms in the oil sector have slashed under-recoveries of the PSU oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — from selling fuels below cost. Freeing up of diesel prices has also increased the possibility of the OMCs earning higher margins on marketing the fuel. Next, the subsidy sharing mechanism for 2015-16 has been announced and the OMCs are being fully compensated for under-recoveries.

So, their borrowings have come down, and consequently their interest cost. BPCL has also posted good refining margins — the difference between the cost of crude oil and the price of the refined products. The company has been able to control its inventory losses arising from the decline in crude oil prices, better than peers. All this helped BPCL grow profit at a robust 23 per cent in 2014-15, and nearly double it in the recent June and September quarters.

The continuing rout of crude oil has worked to the benefit of the OMCs. One, prices of refined products, too, have fallen but the refining margin, which eventually matters, has remained fairly healthy. Also, low cost of crude should mean lower under-recoveries and lower fuel losses on refining.

Weak global demand and oversupply should keep crude oil subdued.

Finally, BPCL has a significant presence in the exploration business, which should help in the long run.

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