BP shares (LSE: BP.) have been on the rise in recent months, as the energy giant battles to prove it can deliver reliable returns in a tricky market. The FTSE 100 stock has often divided opinion, but it’s hard to ignore when the dividend yield is closing in on 6% and analysts are warming to its strategy.
Signs of improvement
Second-quarter results on 5 August got a decent reception, with BP reporting $2.7bn in underlying replacement cost profit, comfortably ahead of forecasts. Broker Berenberg quickly shifted its rating from Hold to Buy, and hiked its price target from 385p to 500p. It highlighted stronger free cash flow, lower spending and signs of recovery in the downstream business.
Management is also trying to streamline operations. A $20bn divestment programme is under way, with the aim of cutting debt and funding further share buybacks.
FTSE 100 recovery target?
BP is sharpening its focus on traditional oil and gas production, and there’s been good news here, with the group’s biggest oil and gas discovery in 25 years off the coast of Brazil.
It has also struck a memorandum of understanding with Egypt to explore drilling in the Mediterranean, plus a three-year LNG supply deal with Turkey’s BOTAS. These initiatives could support the target of producing up to 2.5m barrels of oil equivalent a day by 2030.
Today’s whopping forward price-to-earnings ratio of 242 is enough to terrify the most optimistic investor, but the forward P/E of 14.25 for 2025 is much more grounded.
Past performance
BP shares were trading around 380p on 14 June. They’re now close to 420p, which means a rise of 10.5% in just three months. A £10,000 investment back then would now be worth £11,050. That’s a solid start, with dividends to look forward to.
Investors wouldn’t have picked up the 27 June dividend as the shares had already gone ex-dividend on 15 May, but there’s a payout due on 15 September of 8.32c, or 6.2p per share. Since investing £10,000 on 14 June would have picked up around 2,630 shares, they can look forward to receiving around £163.
Looking ahead, analyst forecasts produce a median 12-month price target of just over 469p. From today’s level that’s an expected increase of around 11.7%. Add in a forecast yield nudging 6% in 2026, and the potential total return comes to 17.7%. If correct, that would lift a £10,000 stake to about £11,770 over the next year. As ever, these are predictions, and far from guaranteed.
Bargain dividend growth stock?
Of the analysts covering the stock, 10 say Buy, 17 say Hold and only one says Sell. That last one surprised me. I would have expected more sceptics out there. There are constant risks, from oil price volatility to unguessable OPEC output decisions and the costly nature of exploration.
Yet the stronger cash flow, solid dividend policy and fresh discoveries suggest things are moving in the right direction. For me, BP is one to consider buying, especially for those willing to take the long view in a cyclical sector. Investors must brace themselves for some volatility as well, because it’s that kind of stock.
