BP (LSE: BP) shares are among the most heavily traded in the entire London stock market. Indeed, they usually feature in brokers’ lists of the most bought and sold UK shares each week.
However, BP shares face a problem that will only mount in the years ahead. As an oil and gas supermajor, the company is one of our planet’s biggest polluters. Hence, pressure is building on BP and other major energy giants to move more quickly towards a clean-energy, low-carbon future.
BP shares bounce about
Over the past 12 months, BP stock has bounced around quite vigorously. The share price has moved between a 52-week low of 421.1p on 28 September of last year to a 52-week peak of 570.57p on
10 February.
As I write (on the afternoon of Monday, 5 September), BP shares hover at 505.2p. With over 17.2bn shares in issue, this values the energy Goliath at a whopping £87.6bn. This makes the group the FTSE 100‘s fifth-largest member.
Over the past year, BP stock is up by just over 9%, versus a 2.4% rise for the wider Footsie. However, over five years, the shares have dropped by 5.9%, while the FTSE 100 has eked out a 2.5% rise. However, these figures both exclude cash dividends, which add up to billions of dollars each year from BP.
Three reasons we bought BP in August
Last month, after much persuading from me, my wife finally bought BP shares for our family portfolio. We paid an all-in price (including stamp duty and buying commission) of 484.1p. Thus, at current price levels, we have made a modest paper gain of 4.4%. But short-term gains aren’t why we bought BP.
The first reason we bought this blue-chip stock is that the shares look relatively cheap to me. They trade on a lowly multiple of just 6.2 times earnings, for an earnings yield of 16%. That’s well above the FTSE 100’s earnings yield of around 9.3% a year.
Then again, history has taught me that oil stocks can be very volatile, largely because the oil price itself is often turbulent. For example, the price of a barrel of Brent crude oil has zigzagged between $70.12 (20 March 2023) and $99.56 (7 November 2022) over the past 12 months. It’s currently $90.
The second reason we bought BP shares was for their attractive (and hopefully rising) dividend yield. At the current share price, this comes to 4.2% a year, just ahead of the Footsie’s yearly cash yield of 4.1%.
The third reason we bought this stock is that BP’s huge cash flows mean this dividend is easily covered by trailing earnings. Indeed, with dividend cover nearing 3.8 times, I regard this cash payout as safe as houses — for now, at least.
I’m ready for a rough ride
Though my goal is to hold BP shares for many years, public opinion of fossil fuels is turning increasingly negative. To avoid worsening climate change, the company must reinvest more of its profits into new technologies. Hence, if I don’t seen solid signs of this transition, then I may be forced to sell this ‘dirty’ stock one day!
