£20,000 invested in BP (LSE: BP) shares this time last year would now be worth around £35,608, with dividends included. It is a stunning return of 78% in just 12 months.
This was driven by high energy prices, aggressive share buybacks and some of the strongest cash flows BP has generated in years.
That said, the firm is now targeting even higher returns from its key businesses, while continuing to prioritise shareholder distributions.
So is now exactly the right time for me to buy more of the stock?
Where’s the growth coming from?
The share price and dividend trajectory of any firm are ultimately driven by earnings (profits) growth. A risk to BP is any sustained period of much lower oil and gas prices, which could squeeze its margins. Another is the rising cost of its energy‑transition strategy, which could pressure free cash flows over time.
Nonetheless, analysts forecast that BP’s earnings will grow a whopping average of 23% a year over the medium term. And this looks well supported by its recent results.
The numbers showed record operational performance, with upstream plant reliability hitting 96.1% and refining availability reaching 96.3%.
The metrics are important, as high reliability directly lifts volumes and margins, which in turn support dividend cover and long-term growth.
Meanwhile, operating cash flow came in at a whopping $24.5bn (£17.9bn), despite softer commodity prices over the period.
Are the shares still undervalued?
Just because a stock’s price has risen a lot does not mean no value remains in it, because price and value are different things. Price is whatever the market will pay at any given moment, while value reflects the underlying business’s fundamentals.
The difference between the two is crucial for the profits of long-term investors. This is because share prices tend to converge to their ‘fair value’ over the long run.
Discounted cash flow analysis identifies where any stock should trade by projecting the future cash flows of the underlying business. The outcomes of different analysts’ DCF modelling vary, depending on the data used. However, my modelling — including a 7.3% discount rate — shows BP shares are 39% undervalued at their current £5.79 price.
This suggests a fair value for the shares of around £9.49 — nearly double where they trade today.
So the gap here between price and value suggests a potentially superb buying opportunity to consider today if those DCF assumptions prove accurate.
My investment view
It is not just the huge potential share price gains I am eyeing from BP, but sizeable dividend returns too. It currently generates a dividend yield of 4.3% — well above the present FTSE 100 average of 3.1%. But analysts forecast this will rise to 4.7% by 2028 — although it could go down or up over time.
So, my £20,000 holding in the oil giant would make £11,971 in dividends after 10 years and £61,694 after 30 years. These numbers reflect the forecast 4.7% yield and the dividends being reinvested back into the stock.
After 30 years, my holding would be worth £81,694 (including the £20,000 initial investment). And this would pay me £3,840 a year in dividend income!
Given this income stream and the strong potential share price gains, I will buy more of the shares very soon.
