With its dividend yield of 5.7%, BP (LSE: BP) might look like a tempting income share at first blush – especially with its price-to-earnings ratio of just 6. But performance in recent years has been mixed. For starters, a savage dividend cut in 2020 means that even recent strong growth has failed to bring the payout per share back to where it was five years ago. On top of that, the BP share price has fallen 21% in the past year.
Given the apparently low valuation, attractive yield and lower share price, could BP now be a bargain?
Missteps have hurt investor confidence
At its heart, I think BP is a solid company. Last year, for example, turnover fell – but still came in at $210bn. After recording a loss after tax from continuing operations in the prior year, BP last year reported a post-tax profit on the same basis of $15.8bn.
On one hand, that is a net profit margin of 7.5%. It looks fairly fragile given the ever present risk of energy prices moving around, sometimes dramatically and unexpectedly. After all, BP’s basic earnings per share have been volatile over the past few years.
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On the other hand, it also underlines that BP has the potential to be a money machine. Based on last year’s performance, in the time it takes you to read this article, BP will have earned over $180,000 in post-tax profit.
So, why has the share price been falling to a point where its valuation looks so cheap?
Partly I think it reflects weakened investor confidence. The company seemed to be retreating from fossil fuels in recent years but is now more ambivalent. The dividend cut also did not help.
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While BP cut its dividend in half in 2020, US rival Exxon kept raising its payout per share each year, as it has done for decades already.
A possible bargain?
But in the long term I think business fundamentals ought to outweigh investor sentiment.
BP is doing well. If energy prices stay close to current levels, or move higher, I expect that it can keep on producing the goods. On that basis, the current BP share price looks like a possible bargain to me.
I plan to hang on to my stake in the energy major and enjoy the passive income streams I hope it will keep on pumping out along with the oil.
Energy prices are volatile though. Perhaps the weakness seen over the past year signals a market expectation that oil companies’ profits could be set to fall. Rival Shell has also seen its share price fall in the past year, albeit by a more modest 6%.
That is always a risk of investing in energy companies, as I see it. For now at least, I feel the risk is more than reflected in the share price.
The post Down 24% in a year, is the BP share price in bargain territory? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
Here’s the BP share price and dividend forecast for the next few years
Will the BP share price hit 500p in the next year? Here’s what the experts say
Where might the BP share price go in the next 12 months? Here’s what the experts say
£100 a month and 3 dividend shares yielding 5.8%+. Could this get me passive income of £11,297 a year?
£9,000 of BP shares could make me a yearly passive income of £2,825!
C Ruane has positions in Bp P.l.c. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
