FTSE 100 shares may be tumbling almost across the board, but not BP (LSE: BP). Despite the latest market turmoil, the BP share price has gained a healthy 27% over the past 12 months.
Even after the rise, BP’s longer-term valuation still looks attractive based on current forecasts. We’re looking at a forward price-to-earnings (P/E) multiple of around five, or a little higher, in the next couple of years. We look set for a dividend yield around 5% too.
This year’s events do tell me one thing, at least. Those who, back in 2020 when BP unveiled its net zero plans, thought they saw the imminent end of the hydrocarbon fuel industry were wrong.
Yes, we’re increasingly moving to renewable energy sources. But I’ve also maintained that it’s not going to happen overnight, and there’ll be demand for oil for a good while yet.
Fair value?
The latest gains have been spurred by the rising price of oil. But I can’t help feeling it was a justified correction anyway. After all, the BP share price is still below its pre-pandemic level, and down 8% over the past five years.
The big question is whether BP might be set for sustainable growth now, on the share price and dividend fronts. Earnings will inevitably vary if we see further oil price swings, which I would think is very likely. But that doesn’t mean dividends will rise and fall in line.
Admittedly, BP did cut its dividend in response to the pandemic, but that downturn was somewhat extreme. Looking forward, analysts are projecting dividend cover by earnings of better than five times. That should mean plenty of spare cash above what’s needed to pay the dividend.
Spare cash
BP started a new $3.5bn share buyback programme in August, on the back of first-half results, and after it had completed its previous buyback a month before.
I see two positives from that. Having plenty of spare capital to return makes the future of the dividend look brighter. And returning it via a buyback lends support to future yields as the cash will be spread across fewer shares. Oh, and it suggests BP thinks its shares are cheap enough to buy now too.
BP reported operating cash flow of $19bn in the first half of the year. A year previously, oil had been a lot cheaper, so the future depends on where the price goes.
Oil prices
I won’t try to predict that, but I suspect we’ll see an average long-term price somewhere between last year’s lows, and the current level of a little over $90.
Would I buy BP shares now? No. And it’s really down to the uncertainty and the cyclical nature of the oil business. I expect profitable average oil prices in the long term. But we could well face more big dips from time to time. And a recession could dampen demand for oil, as it already appears to be doing.
I think BP shares could have a good bit more upside in them. But I see shares out there with dividend prospects at least as good, but with less volatility risk.