Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil’s increasingly seen as evil. But BP’s a cash cow, and it still pays good dividends.

| More on:

Image source: BP plc

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.

For decades, the idea of the BP (LSE: BP.) share price being as low as it is today would have been unthinkable.

A forecast price-to-earnings (P/E) ratio of under eight, dropping to seven by 2026? For a FTSE 100 oil stock? One of our all-time great dividend machines? What is the world coming to?

Still, BP shares have regained a bit of of the ground they lost in the past few years.

Low valuation

This came back to my mind when I read the recent comments from Shell CEO Wael Sawan. He said his firm’s low valuation might even spur the board to drop its London listing.

BP’s P/E might be under eight, and it’s around nine at Shell. But over in the US, Exxon Mobil has a P/E of 13.5.

But if we have a few years of good dividends, I think we might see some share price progress. Here’s how forecasts could affect BP’s P/E and its dividend yield (DY) in the next few years:

Year202420252026
Forecast P/E7.57.46.9
Forecast DY4.4%4.7%5.0%
Cover2.7x2.7x2.7x
(sources: Yahoo!, MarketScreener)

Top dividend stock?

There’s something else I never thought I’d see over the years. That’s a stock paying dividends heading to 5%, covered 2.7 times by earnings, and selling at a P/E of only around half the long-term FTSE 100 average.

Well, at least not one that’s in trouble, having a hard time, or struggling in some way. But BP’s struggling, isn’t it? It’s up against the shift to renewable energy sources, and oil will soon be history. Won’t it?

Well, not so fast…

Oil demand

It looks like global oil consumption rose by around two million barrels a day in 2023. And forecasts suggest rises of more than a million barrels a day in 2024 and in 2025.

And longer term forecasts suggest demand will keep rising for at least the rest of this decade, and won’t peak until after 2030.

By then, we could see demand of around 108 million barrels a day. That’s a lot of energy. And anyone who thinks we can replace that with wind and solar sources overnight is, I’d say, very likely to be mistaken.

I expect strong oil demand to be with us for a least a few more decades yet.

BP share price

None of this is likely to affect the BP share price unless those dividends keep growing. And unless sentiment gets back behind the reality of the world’s still-insatiable thirst for oil.

Just to put a finger in the air, even a P/E of a modest 10 could mean a BP share price of around 685p. That would be a 33% rise from current levels.

Still, oil consumption must fall some day. That’s a risk, a big one. But it could still be a far distant day. Weak sentiment behind UK oil stocks could also be with us for a long time though.

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.

Alan Oscroft 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.

More on Investing Articles

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

This dividend stock could pop next week!

This dividend stock happens to have one of the biggest dividend yields I've come across -- 10.7% -- but I'm…

Read more »

Investing Articles

Up 81%, can this FTSE 100 turnaround share keep surging?

This recovering retailer has been one of the FTSE's greatest performers over the past year. Royston Wild considers whether it…

Read more »

Happy couple showing relief at news
Investing Articles

£10,000 in savings? I’d buy 4 passive income shares to target a £100 per week second income!

By buying passive income shares today, I have a great chance to eventually make life-changing wealth. Here's how I'd invest…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

I think this may be an unmissable chance to buy an oversold UK share before it rallies hard

Harvey Jones piled into this beaten down UK share because it looks cheap and offers a sky-high yield. Now he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’d invest £500 a month in shares to target a £29,000 second income

Investing in shares is a tried-and-tested way to build a second income. Our writer explains how he’d do it, starting…

Read more »