The BP (LSE: BP) share price has been falling.
But with the stock near 388p, the dividend yield is almost 6.7% for 2025.
Meanwhile, City analysts predict dividend rises ahead because of the company’s strong operating cash flow.
At first glance, that high yield makes the stock look like good value.
Volatile commodity prices
But it’s worth considering that the price of oil tends to drive the share price, at least in the short term. The company also has operations in gas and low carbon energy, but oil remains a huge part of the business.
However, trying to work out where oil and commodity prices may be going can be ineffective. Many variables affect prices and lots of them are unpredictable.
Nonetheless, the cyclicality in the industry is perhaps the biggest risk shareholders need to face with this stock.
It’s easy to mistime an investment and end up losing money on the shares despite the high dividend yield. In the past, pandemics, war, oil-spill disasters, and many other events have challenged the business.
But BP has a long multi-year record of stable operating cash flow. It suggests the dividend may be secure for the time being. Meanwhile, analysts forecast increases of around 7% in the shareholder payments for both this year and next.
Another positive sign is that BP has been buying back some of its own shares. Cash-strapped businesses can’t do that, no matter how much good value the directors see.
Reshaping for the modern energy sector
On 29 October with the third-quarter results, chief executive Murray Auchincloss said there had been “significant” progress since the beginning of the year. The directors are aiming to make BP “simpler, more focused and higher value”.
The firm’s oil and gas business has the potential to grow over the next few years by focusing on “value over volume”. So that suggests an approach of choosing projects and activities with care.
Auchincloss also underlined the company’s “deep belief” in the opportunities arising from the push towards energy transition. BP has several “leading positions” in greener energy operations and plans to keep investing in the area.
Nevertheless, it’s tempting to wonder whether a long-term decline in the use of oil and gas will lead to shrinking operations over time. But I reckon the company has the opportunity to redeploy cash flow into its greener energy projects or any businesses it wants to.
So BP looks like a decent candidate for consideration if investors want a long-term position focused on dividend income. The stock may sit well in a diversified portfolio of shares with a long-term investment horizon in mind.
I reckon it may be better to look at the stock opportunity now rather than when the stock’s been riding high with a fatter valuation.
