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

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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.

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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.

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.

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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.

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