As BP’s share price drops below 400p, is it time for me to start buying?

BP’s falling share price means the oil giant now offers a tempting 6% dividend yield. Is this a bargain buy, or does the stock still have further to fall?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

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.

The BP (LSE: BP) share price dropped below 400p earlier this week. Historically, that’s a level that’s only generally been seen during troubled times for the company.

This year’s slump has pushed BP’s dividend yield up to 6%. I’m wondering whether this slump could be an opportunity to add the oil and gas giant to my income portfolio.

Created with Highcharts 11.4.3Bp P.l.c. PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Why are the shares falling?

Uncertainty in the Middle East has led to increased oil price volatility this year. Any major disruption to supplies could cause prices to rise.

Should you invest £1,000 in Coca-Cola HBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Coca-Cola HBC made the list?

See the 6 stocks

The oil price has swung around as speculators have bet on different scenarios. Brent Crude oil reached $90 per barrel in April, but has fallen to $74 per barrel at the time of writing.

Another complication is that weaker global demand for refined products such as petrol and chemicals is also hitting BP’s profits.

In its third-quarter update, BP warned that profits from its refineries fell by $400m-$600m during the third quarter.

Are we heading for another oil crash?

Over the last 16 years, I’ve seen the oil market crash on three occasions (2008, 2015 and 2020). That’s not what’s happening now. So far this year, we’ve just seen a moderate slowdown.

According to the September edition of the authoritative IEA Oil Market report, the main reason for this is “a rapidly slowing China”, where oil consumption has been falling in recent months.

At the same time, the IEA says that global oil supply has been rising, despite some outages in Libya and Norway.

The reality is that no one quite knows what will happen next. Lower oil prices might stimulate stronger demand, but this isn’t guaranteed. A deeper slump might be needed to rebalance the market.

A lot depends on what happens in China — something that’s tough to predict.

Is BP cheap enough to buy today?

Bumper profits since 2021 have allowed BP to rebuild its dividend and repay debt. The company has also funnelled billions of dollars into share buybacks – the share count has fallen by a quarter since the end of 2021.

I think BP is probably in better financial health than it’s been for a long time. Even in another crash, I think the company would be likely to cope better than it might have done in the past.

I’m also encouraged by CEO Murray Auchincloss’s commitment to “a resilient dividend”.

In the company’s half-year results, Auchincloss said that the payout should be supported by cash generation at oil prices down to “around $40 per barrel Brent”.

City analysts’ earnings estimates also suggest to me that the dividend will remain safe, barring a major market crash.

The latest broker forecasts for 2024 indicate that earnings of $0.64 per share should be enough to cover the expected dividend twice. That’s generally considered a decent safety margin and gives me confidence in the 6% yield on offer.

On balance, I think the shares look reasonably priced today and probably offer a safe dividend.

However, my sums suggest they’re are not at a truly bargain basement level.

Given the uncertainty facing this business, I’m going to wait a little longer before making a decision.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Roland Head 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

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »