BP shares now yield 8%! Are they too cheap to ignore?

The BP share price is now at its lowest level for 25 years. Roland Head asks whether the shares now offer value for long-term investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

As I write, BP (LSE: BP) shares have dipped to a 25-year low of 198p. Even after this year’s dividend cut, that gives the energy giant a dividend yield of more than 8%. In a market that’s hungry for income, I reckon that’s one good reason to take a fresh look at BP.

There’s also a second reason to be interested — BP returned to profit during the third quarter, beating analysts’ forecasts for a small loss. The company is charging ahead with plans to cut costs and increase its focus on renewable energy, targeting net zero status by 2050.

Can BP succeed? The jury is still out. But new chief executive Bernard Looney is keen to prove that he can transform the firm for the 21st century. I’m not writing off this 112-year old firm just yet and have been watching the stock closely.

Should you invest £1,000 in 3i Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if 3i Group Plc made the list?

See the 6 stocks

A surprise profit

BP surprised the market this morning by revealing an adjusted profit of $86m for the third quarter of 2020. To put this in context, the figure for the same period in 2019 was $2,254m.

The news gave BP’s share price a brief lift, but it didn’t last long. This may be because BP’s losses for the first nine months of 2020 still total $5,805m, even after a stronger third quarter.

Management were keen to distract investors from this dire number by talking about all the progress the company is making. To hit its net zero target by 2050, BP plans to cut oil and gas production by 40% over the next 10 years. Unfortunately this requires significant job cuts. According to BP, 4,900 out of a targeted 10,000 job cuts have been agreed so far. More are expected before the end of the year.

I’d imagine that some jobs will be created by the company’s plan for a tenfold increase in spending on low-carbon energy by 2030. During the third quarter, the company made some progress in this direction, with two US wind farm investments and a contract award for an electric car charging network for the Scottish police.

Interestingly, the company said that despite a 7% drop in demand for petrol and diesel so far this year, earnings from “fuel marketing” have risen, thanks to growth from convenience store sales at garages. I see that as a (small) positive step towards the company’s goal of becoming a consumer energy brand.

BP shares: my verdict

As an income investor, I want to like BP. An 8% yield — paid quarterly — is a rare thing these days. After cutting the payout earlier this year, Looney plans to maintain the dividend at this level for the foreseeable future. That could be a nice source of income.

The problem is that today’s quarterly results really don’t tell us anything new. Success in the energy industry is measured in decades, not months. BP’s progress over the last three months seems reasonably good to me. But it’s too soon to know whether these changes will help the company become a profitable, low-carbon energy business.

BP shares look cheap to me, trading on 10 times forecast earnings with an 8% dividend yield. But for now, I think that’s probably a fair price. In my view, the shares are cheap because the company’s future is uncertain. I’m going to continue watching BP, but I’m not buying today.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Roland Head has no position in any of the shares mentioned. 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Here’s how a 40-year-old could start investing £100 per week to retire early

If a 40-year-old decides to start investing today, here's how they could potentially turn £100 a week into over £500k…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

The FTSE 100 is up 60% in 5 years. Here’s why — and a big lesson!

The flagship FTSE 100 index has put in a very strong performance over five years. There's a specific reason for…

Read more »

Investing Articles

How much do investors need in an ISA to earn a £2,500 monthly passive income?

Charlie Carman explores how investors could strive for £30k in tax-free passive income each year from a dividend stock portfolio.

Read more »

Investing Articles

How much would a 45-year-old need to invest in an ISA to earn a £1k monthly passive income at 65?

Harvey Jones looks at how much an investor would need to put away every month to build a steady passive…

Read more »

Investing Articles

3 things to do ahead of the new 2025-26 ISA year

It's time for us all to put on our investing boots and get to work on developing our plans for…

Read more »

Older couple walking in park
Investing Articles

Is £150,000 enough to generate £1,000 a month in passive income?

Stephen Wright takes a look at three UK stocks with dividend yields above 8% that passive income investors might be…

Read more »

Investing Articles

Aim to earn a £50k second income in retirement by investing just this much each month

Even with a small monthly investment, it’s possible to earn a £50k second income with a successful investment strategy and…

Read more »

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

Down 22% in a month! Is this my chance to buy shares in this FTSE 100 outperformer?

Shares in InterContinental Hotels Group have outperformed the FTSE 100 over the long term. So is a chance to buy…

Read more »