As I have noted before, BP (LSE: BP) shares look cheap compared to the company’s potential. To use the words of the firm’s CEO, Bernard Looney, the corporation has become a “cash machine” as it profits from high oil prices.
This could lead to significant returns for investors. With profits flowing, the firm has plenty of funds to reduce debt, increase its dividend, and even repurchase more shares.
As such, I have been wondering if I should buy £1,000 worth of BP shares for my portfolio to capitalise on the firm’s growth potential.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Rising profits
According to current City analyst projections, BP will report earnings of $12.5bn for 2021. This is the highest figure since the oil price crash in 2014.
Profits could rise further in 2022. Analysts have pencilled in a net income of $13.8bn for the year, putting the stock on a forward price-to-earnings (P/E) multiple of 7.3.
Of course, these are just projections. The price of oil is incredibly volatile. There is no guarantee prices will remain at current levels for the next 12 months. If they fall substantially, analysts will have to revisit their projections. And any investors who bought in thinking stock looked cheap compared to its outlook could also be left shortchanged.
Despite this risk, I am optimistic about BP’s potential. It is not so much the company’s exposure to high oil prices that I am excited about. It is more about management’s green energy ambitions.
BP aims to establish a pipeline of renewable energy projects totalling 20GW by 2025 and 50GW by the decade’s end. When the organisation announced this target, analysts speculated it would have to reduce shareholder returns or ignore other sections of the business to hit its goals.
With profits surging, I think BP will be able to return cash to investors, invest in green energy, and reduce debt. To put it another way, I believe the company is currently operating in a goldilocks environment.
BP shares as an income play
By investing in green energy, the company is preparing for the future. As this transition takes shape, I think the market will reward the stock with a higher valuation.
Indeed, corporations with exposure to the hydrocarbon industry are currently receiving the cold shoulder from investors. Meanwhile, green energy stocks are surging in value.
It now looks to me that BP has the financial capacity to manage this change without cutting shareholder returns. This makes the company even more appealing in my eyes, as the shares currently offer a dividend yield of 4.2% at the time of writing.
There is scope for this payout to grow too, but I will not stake any money on this just yet, considering BP’s investment goals.
Overall, BP shares seem to me to offer growth and income potential over the next few years. As such, I would be happy to invest £1k in the stock today as a long-term investment.
