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3 Ways BP plc Will Continue To Lag Its Sector

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at BP plc (LON:BP) (NYSE: BP.US).

Valuation

BP sits within the FTSE 100 oil & gas producers sector, which has three major constituents, BP itself, Royal Dutch Shell and BG Group. However, as BP and Shell currently have a combined market capitalization of approximately $362 billion, the oil & gas producers sector is heavily weighted towards these two oil behemoths.

That said, BP currently trades at a historic P/E slightly below its sector average. Indeed, BP trades at a historic P/E of 12.8, while the oil & gas producers sector as a whole trades at a historic P/E of 13.1. What’s more, close peers Shell and BG trade at a historic P/E of 8 and 15.5 respectively.

So overall, BP’s current valuation looks to be about average. 

Company’s performance

However, it’s debatable whether BP deserves a higher valuation than industry leader Shell. In particular, thanks to the Gulf of Mexico disaster and subsequent asset disposals, BP’s earnings per share have collapsed nearly 50% during the past five years.

Still, City analysts expect BP’s earnings per share to jump 15% during the next two years, which is faster than the growth forecast for both Shell and BG.  City analysts expect Shell’s earnings to stagnate for the next two years, while BG’s earnings are forecast to expand 10% during the same period.  

Nonetheless, with litigation from the Gulf of Mexico disaster still over hanging BP, I am hesitant to suggest that BP deserves a premium over its peers. 

Dividends

Having said all of that, at present BP’s dividend yield of 4.4% is impressive and is slightly above the oil & gas producers’ sector average of 4.2%. Additionally, City forecasts are predicting a 18% increase in the company’s payout during the next two years.

Unfortunately, BP’s current yield of 4.4% lags that of larger peer Shell, which currently offers a dividend yield 5%. Still, City analysts are currently only forecasting payout growth of 8% for Shell’s dividend during the next two years, lagging that of BP.

That said, BG’s dividend currently trails the whole sector and its close peers, with BG only offering a dividend yield of 1.3% at current levels.   

Foolish summary

All in all, BP’s valuation is about average for the sector and the company’s current dividend yield is above the sector average. However, BP currently trades at a premium to its larger peer Shell and I feel that this premium is unwarranted.

Indeed, Shell’s dividend yield is greater than BP’s offering and Shell is not facing crippling oil spill claims like BP.

So overall, I feel that BP is a much weaker share than its peers. 

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 > Rupert owns shares in Royal Dutch Shell.