BP (LSE:BP) reported its earnings for the first three months of 2023 yesterday. Despite £4bn in profits, the BP share price fell by around 9%.
Investors were underwhelmed by the company’s falling profits and lower share buybacks. But I think the share price drop could be a great opportunity for those seeking passive income.
BP earnings
Investors clearly weren’t too impressed with what they saw from BP in the first quarter. But what exactly was the problem?
One issue is that the business produced 20% less in profits than it did a year ago. Another is that the company announced it was going to repurchase shares slowed down.
I think there are a couple of things worth noting though. First, the fall in profits is being compared to a period when oil prices were extraordinarily high – during the start of the Russian invasion of Ukraine.
Second, the slowing pace of share buybacks is in line with the company’s guidance. BP has a policy of using 60% of surplus cash to fund repurchases and the proposals are in line with this.
Overall, I thought the earnings report looked fine – lower net debt also strengthened the company’s balance sheet. And a 9% decline in the BP share price might be an opportunity for passive income investors.
Passive income
At today’s prices, BP shares come with a 3.59% dividend yield. That’s paid quarterly, so over the next three months, an investor buying the stock today could expect to receive a 0.9% return in the next quarter.
On top of this, though, there are share repurchases. Income investors also need to be aware of these as a source of passive income.
Companies buying in stock allows shareholders to sell part of their investment without diluting their overall stake in the company. The cash they generate provides passive income.
BP’s plan for the next three months is to spend around £1.4bn on buybacks. With the company currently having a market cap of around £85bn, that’s a return of 1.65%.
Shareholders can therefore sell 1.65% of their investment to generate additional income without owning any less of the overall business as a result. Adding that to the 0.9% return means an overall return to owners of 2.55% in the next quarter.
If BP maintains this going forward, there’s an annual return of over 10% for investors. In my view, that’s extremely attractive.
Outlook
I don’t think there’s any argument a 10% annual return would represent a good investment. But the real question is whether BP is going to be able to keep this up.
A lot of this depends on oil prices. The company’s profitability and continued shareholder returns depend on oil prices staying fairly high in the future.
I think there’s a decent chance of this – and I’m not the only one. Warren Buffett has been investing heavily in oil stocks like Chevron and Occidental Petroleum on the basis that oil prices are likely to stay strong.
The bigger risk to me looks like the possibility of outside interference. BP’s high profits at a time when energy bills are going up is attracting unwanted headlines.
As a result, I’d be concerned at the possibility of higher taxes and regulations cutting into profits. But if this doesn’t happen, this could be a great passive income investment.
