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BP plc isn’t the only Footsie giant delivering a massive earnings turnaround

It seems like only yesterday that the oil price was in freefall and the experts were telling us all to stay away from oil shares. Some smaller companies went to the wall but the direst predictions for the oil price never materialised, nor did predictions of dividend cuts for FTSE 100 heavyweights BP (LSE: BP) and Shell.

With the price of oil gradually recovering from the lows of early 2016, BP is delivering a massive earnings turnaround. Investors who were greedy when others were fearful are enjoying tremendous capital gains as well as huge cash dividends. And the City consensus is for those earnings to continue rising and dividend payouts to continue flowing.

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Gushing higher

Analysts are forecasting BP will post earnings per share (EPS) of 28 cents this year (21.2p at current exchange rates), giving a price-to-earnings (P/E) ratio of 23.3 at a share price of 494p. There’s no denying this P/E is on the high side but the market is looking ahead to an EPS forecast of 38 cents (28.8p) next year, bringing the P/E down to 17.2, and 45 cents (34.1p) in 2019, bringing the P/E down to 14.5.

BP insisted throughout the oil rout that it could maintain its dividend and most analysts now seem to agree that investors will continue to get a 40 cents annual payout (30.3p at current exchange rates). This would provide an annual yield of 6.1% with the potential for increases after the dividend becomes covered by forecast earnings in 2019.

The fact that we have to look forward as far as 2019 for Shell’s P/E to come down to 14.5 — putting it on a par with the FTSE 100 historical average — suggests to me that the share price is up with events. I think we’d need some significant earnings upgrades for the shares to make strong gains from their current level. The dividend yield may still be attractive for income seekers but, on balance, I’d rate the stock a ‘hold’ rather than a ‘buy’ at this time.

Double switchback

The natural resources roller coaster has been even more extreme over in the mining sector. After four years of declines, EPS at Anglo American (LSE: AAL) saw a massive 169% turnaround last year, soaring to 172 cents from 64 cents in 2015.

At the halfway stage this year, the company reported that net debt had halved and the board reinstated the dividend six months ahead of plan. There were no surprises in a Q3 update today, with some tweaks to full-year production guidance across its diverse operations sending the shares a tad higher to 1,450p.

Analysts are forecasting a further 36% increase in EPS this year to 234 cents (177p at current exchange rates) with a 90 cents (68p) dividend. This gives a P/E of just 8.2 and a dividend yield of 4.7%. On the face of it, Anglo American looks great value. However, analysts’ earnings expectations beyond the current year are the reverse of the rising trend at BP.

A 21% fall in EPS to 185 cents (140p) is forecast for 2018, followed by a further 7% fall to 172 cents (130p) in 2019. This would see the P/E rise from the current-year 8.2 to 10.4 next year and 11.2 for 2019. And with the dividend also forecast to be reduced proportionately, bringing the yield down to 3.6% by 2019, I believe there are better prospects in the market, whether you’re looking for share price growth or dividend income.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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