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Stock Analyst Update

BP Increases Dividend, Announces Repurchases

Q2 brought improved earnings, a stronger financial position, and a brighter market outlook. Our fair value estimate and moat rating are unchanged.

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On the back of improved earnings, a stronger financial position, and a brighter market outlook, BP (BP) announced it would increase its dividend by 4% and repurchase $1.4 billion in shares during the third quarter based on first-half surplus cash flow. Moving forward, it plans to increase the dividend 4% annually through 2025 and repurchase $1 billion worth of shares, assuming oil at $60 a barrel. These amounts do not include the annual $500 million to offset employee stock issuance.

Our fair value estimate and moat rating are unchanged. The shares appear undervalued, and the updated outlook improves BP’s cash yield after it cut its dividend last year, adding to their appeal. However, while oil and gas prices will continue to determine BP’s near-term financial performance, its low-carbon investments will play a larger role over time. It’s the risk around these investments that keeps us cautious.

BP reported another strong rebound in earnings during the second quarter, with adjusted earnings surging to $2.8 billion from a loss of $6.7 billion a year ago, largely on higher commodity prices.  Operating cash flow during the quarter increased to $5.4 billion, which included a $1.2 billion Gulf of Mexico oil spill payment, from $3.7 billion a year ago. After net debt fell below management’s target of $35 billion in the first quarter, it fell further during the second quarter to $32.7 billon.

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Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.