The oil industry’s known for its boom-and-bust cycles. The long-term performance of BP (LSE: BP) shares reflects this. Since 2015, this FTSE 100 stalwart has hit highs of almost 600p – and dropped as low as 200p.
Some investors try to time the cycle, buying at the bottom and selling at the top. A few even manage it. But it’s not easy.
The low points tend to be accompanied by scary news, making it hard to buy. When oil shares are high, I often find investors explaining to me why it will be different this time – and arguing that the shares are still cheap.
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The good news is that there’s a second way to target a profit from BP shares that doesn’t rely on market timing. The energy stock’s one of the London market’s biggest dividend payers. The current dividend gives a 5.9% yield and is equivalent to a payout of about £4bn a year.
Impressively, that’s less than half the £10bn in surplus cash BP’s expected to have generated in 2024. This suggests to me the payout’s likely to be safe, even if oil prices do slump.
Lacklustre returns
Does it make sense to buy BP shares just for their dividend yield? I decided to crunch the numbers. On 16 January, BP shares closed at 413p. As I write today – 10 years later – the share price is 430p.
Clearly, that’s not a great result. But over the same 10-year period, BP’s paid a total of 254p per share in dividends. This means that £10,000 invested in BP shares 10 years ago would be worth £16,560 today, including dividends.
That’s equivalent to a 65% return over the last decade, or an annualised return of 5.2% a year. This isn’t a disaster. But over the same period, the FTSE 100 Total Return index (which includes all FTSE 100 dividends) has risen 86%, or 6.4% annualised. Investors could have done better simply buying an index tracker.
Is BP worth considering today?
These numbers confirm my view that the best time to buy shares in BP is when the energy sector’s in a slump and the shares are cheap on a cyclical view.
I don’t think that’s true at the moment. Although it’s true that BP shares have underperformed some rivals over the last year or so, the group’s profits remain at the upper end of their historic range. This is thanks to strong oil and gas prices and an improved balance sheet.
To consider buying BP, I’d want a dividend yield of 6.5%, or more. That way, I wouldn’t be dependent on strong share price growth to hit my target annual return of at least 8%.
Based on the 2024 forecast dividend, I’d need a price of 385p for a 6.5% yield. That’s only a fall of 10% from the current share price. I reckon it’s quite possible we’ll see that at some point in 2025. After all, over the last 12 months, BP shares have hit a low of 365p and a high of 542p.
I’m sitting tight for now. But BP will stay on my watch list of stocks to consider buying in a market slump.
