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Is BP plc The Best Buy In The FTSE 100?

Investors in BP (LSE: BP) (NYSE: BP.US) should feel much happier about their investment now than they did at the start of the year. That’s because shares in the oil major have risen by 14% since the turn of the year, which is roughly twice the wider market’s growth rate. This shows that investor sentiment in BP is improving, with its bottom line also forecast to rise substantially during the next two years.

Is this enough, though, to make BP the first stock you should buy in the FTSE 100? Or, is it not yet performing well enough to merit that title?

Dividends

An obvious way to glean the financial state of a company, as well as management’s faith in its future earnings, is to look at dividends. Should they be falling or not well covered by profit, then it could indicate that profitability is a concern and that the company needs to reinvest a higher proportion of earnings so as to grow revenue.

In BP’s case, it seems to be in a relatively healthy position. Even after the oil price has more than halved to its lowest level in a significant period of time, BP is set to maintain dividends per share at their 2014 level during the next two years. And, with earnings set to grow by an incredible 61% this year, and by a further 51% next year, BP’s dividend is expected to be covered 1.3 times by profit, which is healthy and provides it with sufficient headroom should the oil price fall further. And, with BP currently yielding a very appealing 5.6%, it remains a hugely attractive income stock.

Price Control

The major problem BP has, though, is a complete lack of control over its pricing. While FTSE 100 rivals that operate in sectors such as consumer goods and technology have a considerable amount of say in the prices they charge to customers, BP is dictated to by the wider oil price. As such, it can do everything right as a business, in terms of managing costs, developing new projects, and diversifying risk, and still end up with disappointing financial figures.

And, while many investors felt that the oil price was a one-way bet in the long run due to reducing supplies and increasing demand, events of the last year have shown this to not be the case, and this leaves BP highly exposed to further falls in sales and profit moving forward.

Looking Ahead

Although BP is a great stock to buy right now, with it having superb growth prospects and excellent income potential, it is not the best stock to buy on the FTSE 100. Certainly, it could be argued that it is the most appealing oil play, but its index peers that have a high amount of customer loyalty and a portfolio of brands are much more likely to offer similar levels of growth, income and value in the long run, while also providing their investors with much more certainty than BP.

While BP may not be the best stock on the FTSE 100, it and a number of its index peers could be worth buying right now. And, to help you find them, the analysts at The Motley Fool have written a free and without obligation guide called 7 Simple Steps For Seeking Serious Wealth.

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Peter Stephens owns shares of BP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.