Is Now The Right Time To Buy BP plc, Centrica plc And SSE plc?

Should you buy BP plc (LON:BP), Centrica plc (LON:CNA) and SSE plc (LON:SSE) today?

| 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.

BP

Shares in BP (LSE: BP) have long been a favourite for income-seeking investors, but investors seem to be increasingly sceptical over whether the oil giant can afford its dividends as commodity prices slump. Underlying earnings have fallen by 42% in the first nine months of 2015, but BP is holding its dividend steady.

BP is working hard to adapt to lower oil prices, and has plans to lower its break-even oil price to around $60 per barrel. But currently, the price of Brent crude oil is just $44 per barrel, well below its targeted break-even point. So unless oil prices recover to at least $60 per barrel, BP would need to fund its dividend by selling assets and raising debt. Although doing this would be sustainable in the short term, neither is a viable long-term strategy.

However, analysts don’t expect oil prices will remain below $60 per barrel indefinitely, and so it would seem that BP’s 6.9% dividend yield should be sustainable. But even though BP’s dividend seems safe, I would prefer to stay out of its shares for now.

Commodity prices are unlikely to bounce back straight away and trading conditions remain uncertain. Most importantly, though, BP’s valuations are not cheap enough. Its shares trade at 15.4 times its expected 2015 earnings, compared to Shell’s forward P/E of 13.3.

Centrica

Centrica‘s (LSE: CNA) prospective dividend yield of 5.1% may look tempting too, but the outlook on its earnings remains unappealing. Being an integrated energy company was supposed to help it maintain a steady stream of cash flows, which would enable the company to pay handsome dividends to shareholders. Recently, though, Centrica’s upstream business has only been a drag on its earnings.

Lower oil prices are largely to blame for the collapse in earnings from its exploration and production business, but it is the company’s focus on regions of high costs of production which has made matters much worse. Adjusted earnings from upstream have fallen some 78% in its latest interim results, and has more than offset all of the improvement to the supply side of Centrica’s business. So, unless we expect oil prices to recover soon, I would prefer to stay out of Centrica’s shares.

SSE

Lower energy prices and weakness in consumer demand is hurting SSE (LSE: SSE), too. And to make matters worse, uncertainty continues to overhang its share price. Investors are remaining on the sidelines as they await the conclusion of the Competition and Markets Authority investigation. Although unlikely, the CMA could see a new regulatory framework being drawn up, and this could potentially see the margins of utility companies squeezed further. Its shares have lost 10% of its value since the start of the year, and now offer a prospective dividend yield of 6.3%.

But there is an important upcoming catalyst that should help its share price. The introduction of a capacity market in 2018, which will see energy companies get paid for keeping their power plants available during periods of peak demand and to back up intermittent renewable generation, should provide a significant boost to SSE’s earnings in the longer run.

Centrica will benefit as well from the introduction of a capacity market, but its smaller electricity generation capacity means it has less to gain. As it stands, SSE would see a boost to its earnings of around 7-9p per share annually, which is worth roughly 6-8% of its underlying earnings. With such an upside to earnings, this seems to be a good enough reason to buy SSE.

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.

Jack Tang has a position in Royal Dutch Shell plc. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »