BP’s share price is down 18% since October, so is it time for me to buy the dip?

BP’s share price drop makes it look even more undervalued to me, especially with solid growth forecasts and increased rewards for shareholders.

| More on:
Two white male workmen working on site at an oil rig

Image source: Getty Images

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.

BP’s (LSE: BP) share price has fallen around 18% from its 18 October 12-month traded high of £5.62. But this has largely tracked the decline in the oil price over that time.

However, such a drop signals to me that now might be a good time to add to my holding in the company.

Very undervalued

BP now trades on the key price-to-earnings (P/E) stock valuation measurement at just 10.4. This is very cheap compared to its peer group’s average of 14.

To ascertain how cheap, I used a discounted cash flow analysis incorporating several analysts’ figures and my own.

This shows BP to currently be about 43% undervalued at its present price of £4.63. Therefore, a fair value would be around £8.12.  

There is no guarantee it will reach that price, but again underlines to me how big a bargain it looks.

One risk in the shares is that the oil price continues to trend down. Another is that government pressure to expedite its energy transition causes it to miss out on oil and gas revenues.

However, consensus analysts’ forecasts are that BP’s earnings per share will grow 10% a year to end-2026. Its return on equity is forecast to be 18.5% by that point.

A quickly changing market

The oil price changes constantly, mainly due to changes in supply and demand and shifting geopolitical risks. 

It has been trending down recently, but this could well be set to change, in my view.

2 June saw oil cartel OPEC extending 3.66 million barrels per day (bpd) of production cuts to the end of 2025. Another 2.2 million bpd will be extended to the end of September 2024.

Together, these cuts comprise around 5.7% of global oil demand. Cuts in global supply are generally bullish for oil prices.

On the other side of the demand-supply equation, China’s economy appears to be growing solidly again. The world’s largest oil importer forecasts economic growth of “around 5%” this year and several major stimulus measures are ongoing.

Increased global demand is also generally bullish for oil prices.

Finally, geopolitical risk remains high. The Israel-Hamas War still threatens to widen across the key global oil-producing region of the Middle East. And international sanctions remain in place on leading world oil and gas producer Russia for its ongoing war in Ukraine.

Increased shareholder rewards

An additional boost to BP’s share price is likely to come from increased shareholder rewards, I think.

It reiterated its commitment to $3.5bn in share buybacks in H1 this year during its Q1 2024 results. This is part of its plan to repurchase at least $14bn in shares over this year and 2025. Buybacks tend to be very supportive of prices.  

It also increased its first interim dividend by 10% — from 6.61 cents (5.17p) a share to 7.27 cents. If this were applied to the total 2024 dividend, the payout would be 30.8 cents. This would give a yield on the current £4.63 share price of 5.2%.

The present yield is 4.8%, based on the 2023 dividend of 28 cents.

Both compare very favourably to the average FTSE 100 payout of 3.8%.

Given its solid growth forecasts, undervaluation, and rising yield, I will be adding to my holding very soon.

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.

Simon Watkins has positions in Bp P.l.c. 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

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d aim to build wealth the same way as Warren Buffett

Christopher Ruane looks at some of the principles used by billionaire investor Warren Buffett and explains why he also uses…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Dividend Shares

Here’s my 2024/25 dividend forecast for National Grid shares after their recent 17% plunge

National Grid shares could still be a good choice for income, even after the recent seven-for-24 rights issue, says Edward…

Read more »