BP (LSE: BP) shares worry me. They’re up just 2.5% in the last year, a period when the FTSE 100 gained almost 20%. Over three years, they’re down 8%, and the malaise stretches even further back. The BP share price trades at similar levels to a decade ago, although with plenty of volatility in between, crashing during the pandemic in 2020 and then soaring after the Russian invasion of Ukraine in 2022.
That spike was dramatic, and may explain recent indifference performance as the energy shock eases. BP’s own decisions haven’t helped. Jumping in and out of renewables damaged management credibility, as did the scandal over former CEO Bernard Looney and the sudden departure of successor Murray Auchinloss.
FTSE 100 underperformer
When I consider all that’s gone wrong since the Deepwater Horizon tragedy in 2010, the stock doesn’t look or feel like a slam-dunk buy. Especially when I clock its price-to-earnings (P/E) ratio, which is almost 248, which is astronomical compared with the FTSE 100 average of around 18. That follows a 97% drop in earnings per share in 2024, from 88 US cents to just 2 cents, as the oil price fell. The forward P/E for 2025 is far more sensible, at 12.5.
BP does have attractions. The board is running generous regular share buybacks of $750m. This is part of a broader strategy to return 30% to 40% of operating cash flow to shareholders, and should help underpin the share price.
But the big attraction is the dividend income. The trailing yield is 5.5% and forecast to rise to 5.7% this year. Dividends are paid quarterly, which I find strangely satisfying as an investor. My next one lands on 27 March. Yet even that doesn’t make BP a slam-dunker. Other FTSE 100 stocks offer bigger yields.
Also, shareholder payouts have been choppy. The dividend was slashed by 36% in 2020 and 17.6% in 2021. It has picked up since with double-digit increases in each of the last three years, but the full-year 2024 payout of 8 US cents is still below the 10.5 cents paid in 2019. And it’s far below the 14 cents investors enjoyed before Deepwater.
Income ups and downs
There’s also the strategic uncertainty. BP’s new CEO, Meg O’Neill, is expected to continue the pivot back towards oil, gas and LNG, playing to its core strengths. But if renewables take a growing share of the energy market and oil demand falls as a result, this strategy could backfire.
Energy is a crucial sector, but it’s also at the mercy of everything from operational disruptions to geopolitical tensions. Where the oil price goes at any given moment is unguessable.
I hold BP, but cautiously. I do it mainly for the income, but also to maintain exposure to the old-school energy sector, which I think still has life left in it. Diversification matters, and I like having a small hedge against unpredictable energy shifts. Also, commodity stocks are cyclical, and the time to buy BP is when its shares are struggling, as they very much are today. On those terms, BP is worth considering with a long-term view. But I wouldn’t go as far as to call it a slam-dunk buy.
