Is buying £1k of BP shares a smart decision?

BP shares have potential as both an income and growth play over the next decade, writes this Fool, who would invest £1k in the company.

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As I have noted before, BP (LSE: BP) shares look cheap compared to the company’s potential. To use the words of the firm’s CEO, Bernard Looney, the corporation has become a “cash machine” as it profits from high oil prices

This could lead to significant returns for investors. With profits flowing, the firm has plenty of funds to reduce debt, increase its dividend, and even repurchase more shares. 

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As such, I have been wondering if I should buy £1,000 worth of BP shares for my portfolio to capitalise on the firm’s growth potential. 

Rising profits 

According to current City analyst projections, BP will report earnings of $12.5bn for 2021. This is the highest figure since the oil price crash in 2014. 

Profits could rise further in 2022. Analysts have pencilled in a net income of $13.8bn for the year, putting the stock on a forward price-to-earnings (P/E) multiple of 7.3. 

Of course, these are just projections. The price of oil is incredibly volatile. There is no guarantee prices will remain at current levels for the next 12 months. If they fall substantially, analysts will have to revisit their projections. And any investors who bought in thinking stock looked cheap compared to its outlook could also be left shortchanged. 

Despite this risk, I am optimistic about BP’s potential. It is not so much the company’s exposure to high oil prices that I am excited about. It is more about management’s green energy ambitions. 

BP aims to establish a pipeline of renewable energy projects totalling 20GW by 2025 and 50GW by the decade’s end. When the organisation announced this target, analysts speculated it would have to reduce shareholder returns or ignore other sections of the business to hit its goals. 

With profits surging, I think BP will be able to return cash to investors, invest in green energy, and reduce debt. To put it another way, I believe the company is currently operating in a goldilocks environment.

BP shares as an income play 

By investing in green energy, the company is preparing for the future. As this transition takes shape, I think the market will reward the stock with a higher valuation.

Indeed, corporations with exposure to the hydrocarbon industry are currently receiving the cold shoulder from investors. Meanwhile, green energy stocks are surging in value. 

It now looks to me that BP has the financial capacity to manage this change without cutting shareholder returns. This makes the company even more appealing in my eyes, as the shares currently offer a dividend yield of 4.2% at the time of writing.

There is scope for this payout to grow too, but I will not stake any money on this just yet, considering BP’s investment goals. 

Overall, BP shares seem to me to offer growth and income potential over the next few years. As such, I would be happy to invest £1k in the stock today as a long-term investment. 

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Rupert Hargreaves 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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