If you like a little risk and don’t mind venturing into the less favourable ‘sin’ stocks. My stock of choice would be oil giant BP (LSE:BP). Although I’m generally opposed to oil stocks as a safe investment, I do think BP has staying power.
It recently raised its dividend to $0.10 per share, it also plans to divest $5bn of assets to maintain its attractive shareholder returns. Despite reporting a small loss in its latest trading update, it has strong cash flow.
It has a price-to-earnings ratio (P/E) of 23, earnings per share are 19p and its juicy dividend yield is now almost 7%. BP also completed its share buyback programme last month.
Renewable resources
BP has the ways and means to get a handle on renewables, from its pots of cash to its history and knowledge in the energy markets.
I think it should utilise this extensive experience to do enough good in the world to counteract the bad. For however desperately we would like to kick oil to the kerb, we’re still too reliant on fossil fuels for it to happen soon. Emerging markets want a piece of the oil action and demand from these countries is increasing, despite a slowdown elsewhere.
External factors to consider
Oil prices are currently suppressed as the coronavirus has created a global economic slowdown. With travel bans in place, there’s less demand for the oil that fuels the planes, ships and cruise-liners. The epidemic has affected the profit margins of many companies and markets, but the price of oil has been most prominently hit since early January when the outbreak became apparent. Long term, the impact of coronavirus is still unknown, but going by previous outbreaks it should be negligible.
The BP share price has looked attractive and undervalued for a long time now, which has seen its P/E creep up. Year-to-date, the BP share price is down 4%, while its peer Royal Dutch Shell has fallen 15%. When the oil price is subdued by external factors, this gives already cheap stocks even more value.
Climate concerns continue
I’m a fan of BP because I think it has the experience and knowledge to make strides in the renewables marketplace better than any up-and-coming small-cap. Nevertheless, it pains me to see the damage done to our beautiful planet by the oil industry.
Climate change protests gained momentum in 2019 and global investment manager BlackRock announced moves into decarbonisation. This trend is likely to continue through 2020, which could cause further pressure on the oil price.
Political developments, such as the upcoming US presidential election, can also impact global oil prices. And after going through the devastating effects of the Gulf of Mexico oil spill, BP knows all too well the costs incurred if such a thing should happen again.
All these factors should be kept in mind when embarking on adding BP shares to your portfolio. Oil stocks are not a risk-free investment, but I think BP is the best of the bunch.
