A 6.1% yield but down 31%! Is it time for me to buy more BP shares?

BP shares offer a high yield that’s forecast to grow to end-2026, and a big projected rise in earnings leaves the stock looking undervalued as well.

| More on:
Two white male workmen working on site at an oil rig

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE: BP) shares have tumbled from their 12 April 12-month traded high of £5.40.

The drop reflects a similar decline in the global oil price, largely due to falling demand from China. This is due to an uncertain economic recovery following three years of Covid.

The other part of the oil price fall comes from rising global supply. Although oil cartel OPEC+ has rolling production cuts in place, these have been offset by increases in other countries.

The oil market outlook

Short term, the bearish outlook for oil might continue for a while on the same factors, in my view. It could change if the conflict between Israel and Iran (and its proxies) spirals into a wider Middle East war.

However, I believe this is likely to change over the long term. The key reason is that the transition to greener energy is likely to take longer than many envisage. Even the UN Climate Change Conference said in December 2023 that its 2050 net zero target needed to be done “in keeping with the science”.

Despite this, oil and gas investment has declined since 2014 in line with this transition timeline, leaving potential production gaps for the future. A supply and demand mismatch like this would support oil price gains for however long it lasted. 

How does the core business look?

Since Murray Auchincloss took over as CEO in January, BP has modified its previously rigid energy transition stance.

It ditched its target to cut oil and gas output by 2030 in October and has scaled back its low-carbon hydrogen investments. It also plans to sell its US onshore wind operations.

On the other hand, it is developing its Gulf of Mexico assets and plans to develop four fields in Iraq. The former contains around 10bn barrels of oil and the latter around 9bn barrels.

Its Q3 results saw underlying replacement cost profit at $2.27bn (£1.76bn), exceeding forecasts of $2.05bn.

A key risk for BP in my view is government pressure for it to resume its previous energy transition programme. This would cause it to lose market share to competitors and damage its profitability.

However, as it stands, consensus analysts’ estimates are that BP’s earnings will grow at 26.6% a year to end-2026.

What about the share price and yield?

Earnings growth is what powers a firm’s share price and dividends over time.

Using other analysts’ figures and my own that factor this growth into a discounted cash flow analysis, BP shares are 49% undervalued.

Given the current price of £3.72, the fair value for the shares is £7.29. They may go lower or higher than that, of course, given the vagaries of the market.

Analysts also forecast that BP’s dividends will rise to 25.4p in 2025 and 26.7p in 2026. This would give respective yields (based on the current share price) of 6.8% and 7.2%. The current yield is 6.1%, given the 22.5p dividend in 2023.

Given these strong earnings projections and their impact on the share price and yield if realised I will be buying more BP stock very soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins 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.

More on Investing Articles

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »