Energy, oil and gas giant BP (LSE:BP) has been giving its shareholders a roller-coaster ride via the volatile share price.
However, the forward-looking dividend yield for 2025 is just over a whopping 6%. Meanwhile, the company’s incoming cash flow remains strong suggesting ongoing support for future dividends.
But since April, the stock’s down around 25%, and it’s been volatile for much longer than that.
Part of the problem is the cyclical nature of commodity prices. Firms like BP can see wild swings in profits because of variable selling prices. On top of that, BP reports in US dollars, so currency exchange rates can affect the share price too.
Timing an investment for cyclicality
Those things are ongoing risks for shareholders. It would be easy to mistime an investment in the shares and end up losing money, despite the high dividend yield.
Nevertheless, I reckon the best times to become interested in a cyclical stock like BP are when the share price has fallen. Such an approach can help to lessen the chances of buying at a cyclical top for the business and the stock. However, I’d be the first to admit the method isn’t fool proof — the cyclicals are difficult to get right.
However, today’s (29 October) third-quarter results report contains several positives. The company reckons it’s driving focus and efficiencies, and delivering resilient operations.
One strong indicator today is that BP has also announced an intention to commence a share buyback programme of up to $1.75bn. The plan is to run the scheme up to 7 February 2025.
That may tell us a few things. Firstly, that the directors reckon the firm can spare the cash needed to buy the shares. Secondly, that they think the current share price offers decent value. And third, that they are confident about the outlook for the business and its ability to keep producing decent incoming cash flow.
City analysts are certainly optimistic. They’ve pencilled in increases of just over 7% for the dividend this year and next. However, earnings over the two periods look set to be volatile.
The anchor of steady cash flow
Nevertheless, the company’s record of incoming cash flow has been steady for some considerable time. It’s one of its great strengths and the main reason I’m interested in the stock for dividends now.
Meanwhile, chief executive Murray Auchincloss reckons BP’s made “significant” progress towards making the business “simpler, more focused and higher value”.
In its oil and gas operations, the directors see the potential to grow with a focus on “value over volume”. On top of that, the company has a “deep belief” in the opportunity arising from the energy transition from fossil fuels to renewables.
Some investors have been concerned about the potential future decline of BP’s oil and gas businesses. But I reckon the company has plenty of potential to direct its vast cash flows to other enterprises in the renewable energy space or anywhere else it chooses.
So for me, BP looks well worth further consideration and research now as a potential long-term hold for dividend income.
