12.5% dividend yield: Is the Woodside share price a buy?

Is the Woodside Petroleum Limited (ASX:WPL) share price a buy for its 12.5% dividend yield due to the coronavirus?

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Is the Woodside Petroleum Limited (ASX: WPL) share price a buy for its dividend yield because of the negative coronavirus effects?

Energy producers like Woodside are facing multiple issues at once. Not only is there an ongoing pandemic, but oil prices have crashed and global demand is a lot lower because transportation has plummeted.

What’s happening?

I’m sure you’re aware of everything that’s going on with the coronavirus on the human healthcare side of things. But in the energy industry, prices are a lot lower. There just isn’t the same demand as there was because of the reduced amount of air travel, commuting and so on.

When there’s reduced demand, the only way to stop a falling resource price is to reduce the supply. But Russia and OPEC couldn’t agree on a reduced supply which is leading to too much supply, resulting in the low price.

Today, we learned (from the AFR) that Woodside has cut about 500 jobs at gas plants in Western Australia across the Karratha gas plant and Pluto. Woodside says no jobs have been cut at Pluto. This is after at least 100 jobs were cut from offshore rigs last week.  

And what about the dividend?

Woodside currently has a trailing grossed-up dividend yield of 12.5%. That obviously looks very attractive. But how likely is it that Woodside won’t cut its dividend? We’re 20 years into this century and Woodside has reduced its dividend several times.

In good times Woodside will pay a big dividend and when the oil price is reduced it will probably result in a lower dividend. Woodside can’t control what the oil price will do.

With the oil price so low and people being let go, I think shareholders should prepare themselves for a dividend reduction. But on the positive side, Woodside has paid a dividend every year – even if it’s heavily reduced.

If you’re thinking about Woodside, I think the best thing to do would be to ignore the dividend. Look at the share price. It’s the lowest it has been since 2004. Energy demand is likely to be lower for weeks or even months, but I think it’s quite likely that Russia and OPEC will come together for an agreement. Even without that, I think Woodside’s share price looks very cheap. Personally, it’s not my type of share. But in two years I think Woodside could be quite a bit higher – just don’t expect huge dividends.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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