If I’d invested £10,000 in BP shares 5 years ago, here’s how much passive income I’d have now!

If I’d invested £10,000 in BP (LSE:BP.) shares in June 2023, my shareholding would now be worth £8,100.

But as recently as February — when the shares were at their highest level since early 2019 — my paper loss would’ve been £275.

Over the past four months, BP’s stock has suffered as oil prices have declined due to an uncertain global economic outlook.

However, I’m also keen to earn a second income. Investors have historically chosen BP for its generous dividends.

Between 2018 and 2023, I’d have received passive income of £2,048 — more than enough to compensate for the loss of capital. But only just.

This year the company is expected to pay at least 22.2p a share. From my hypothetical investment five years ago, I’d earn passive income of £380 in 2023. This would be a yield of 3.8%.

Although a reasonable return, it’s lower than the current FTSE 100 average.

But had I reinvested the dividends at the end of each year, I’d have been able to buy another 494 shares during this period. My passive income would now be £490 and the yield would be 4.9%.

Difficult times

It’s been a turbulent five years for the energy giant.

In response to the pandemic and subsequent collapse in the oil price, the company cut its dividend in 2020 by 50%. Its share price slumped to levels not seen since the mid-1990s. Had I invested at this point, I’d now be sitting on a profit of around £14,000!

Has the time come to buy shares in the UK’s fifth-largest listed company?

Bumper earnings

Last year, BP made an underlying replacement cost profit per share of $1.46.

During the first quarter of 2023 — when the average cost of a barrel of Brent crude was around 20% lower at $80 — it made 27.74 cents per share.

Oil is now trading at around $75. Most forecasts predict an increase towards the end of the year, but not by very much.

Unless there’s a massive shock affecting global energy markets that sends prices rocketing again, it seems likely that, in 2023, BP will fall well short of last year’s earnings.

But the ultimate performance measure is cash.

Last year it generated over $40bn from its operating activities. In 2023, it’s likely to be closer to $25bn.

Despite achieving record profits in 2022, the company has no plans to restore its dividend to previous levels. Last year’s payout cost $4.3bn, so there’s plenty of headroom even if the oil price falls significantly.

Although some refuse to invest in the sector due to environmental concerns, BP is spending heavily on wind, solar, and hydrogen projects. However, the company’s critics say it’s not transitioning quickly enough.

But whether we like it or not, we haven’t yet reached peak demand for oil. Most projections suggest this will not be until at least 2035.

At the moment, I’m not going to invest in BP.

I think the shares offer good value. Even if earnings are 25% lower this year, its price-to-earnings (P/E) ratio is still less than 5.5.

But I think the share price might suffer over the summer as the demand for oil usually falls in the northern hemisphere. I’m therefore going to revisit the stock at the start of September.