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.

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Image source: BP plc

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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:

Forecast P/E7.57.46.9
Forecast DY4.4%4.7%5.0%
(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.

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