Is BP A Bargain After The $20.8-Billion Settlement?

Early this week, the Obama Administration announced that it had finalized the terms of its settlement with BP (BP) stemming from the 2010 Deepwater Horizon oil spill. The final price tag will come in at $20.8 billion, which was higher than the $18.7 billion announced as recently as July. Nevertheless, this removes a major source of open-ended uncertainty for BP. Though it’s been a long road to get here, long-suffering BP investors should be relieved that the ordeal is finally over.

I should probably put “over” in quotation marks because there may still be some private claims from individuals and companies that could pop up. But the biggest potential liability – the federal, state and local-government lawsuit against BP for its violations of the Clean Water Act and other environmental regulations– is now over and done with. Any new claims to come along should be minor.

So, with the financial fallout now behind the company, what does this mean for BP and, the question that every investor wants to know, the BP dividend?

Let’s dig into the details.

BP currently yields a fat 7.0%, the highest among oil majors. And despite the barrage of legal setbacks – not to mention the plummeting price of crude oil over the past year – BP has continued to raise its dividend. Last year, BP raised its quarterly payout from $0.585 to $0.60. And BP has hiked its dividend by a cumulative 45% since reinstating it.

The BP dividend currently costs the company about $6.9 billion per year. That’s considerable higher than the $4.5 billion in free cash flow that BP has generated over the trailing 12 months. (Free cash flow is operating cash flows minus capital expenditures.) So as things stand now, BP has more cash going out the door in the form of dividends than it is taking in from current operations. That doesn’t give much confidence that the dividend is safe.

But it also ignores BP’s massive cash hoard. BP had $32 billion in cash and marketable securities as of the most recent quarter, and has a high credit rating that allows for additional borrowing. So, BP has plenty of cash on hand to pay the dividend at current levels for the foreseeable future.