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Are we seeing a buying opportunity with the BP share price?

The share price of oil giant BP (LSE: BP) is around 13% down from its early October peak in a plunge that seems to reflect weakness in the FTSE 100 index, of which the firm is a constituent.

Of course, the fragility of BP’s share price at the moment is part of the reason that the index has fallen, and BP could be down because the price of oil has declined around 30% since the beginning of October. Once again, BP has shown how responsive its share price is to the fluctuating price of oil, and I reckon any decision to invest in the firm should be based firstly on an opinion about where the oil price might be going.

Where’s the growth in the dividend?

So, are we seeing a buying opportunity with BP now? Well, we could argue that the dividend yield looks attractive because it is running around 6%. But the firm’s record on dividend growth leaves much to be desired. The payment has been static for around five years. You could pile into the shares to collect the dividend, as long as you don’t mind the fluctuation in your capital because of the share price moving up and down with the oil price. BP’s share price chart looks like it has moved broadly sideways since the year 2000, but within that move, it has been as high as about 700p and as low as 350p or so – you could be in for quite a ride.

However, there’s no guarantee that the price of oil will recover from its most recent plunge. It looks like the long-term trend for oil consumption could be down if electric vehicles and renewable power sources saturate the market, as many believe is possible in the decades ahead. On top of that, the US shale oil industry seems to be acting like a brake on oil prices – if oil prices rise, shale oil production kicks in and the extra supply sinks the price of oil again. No wonder BP is having trouble raising its dividend every year.

The one big thing BP can’t control

One of the key requirements for me in a dividend-led investment is that the investee company has the ability to raise its dividend payment a little each year, and BP seems to fail that initial test. If my dividend income rises, I can build up a cushion to insulate my investment from capital fluctuation and risk caused by the company’s share price. But BP seems to be behaving like the cyclical firm that it really is. The main factor affecting the company’s profits is the price of oil, and that is the one thing that the company can’t control.

So, if I invested in BP, I’d approach it as a cyclical investment rather than as an income-generating share. The idea would be to try to buy the big dips in the share price and sell the shares when they are near the top of the trading range established since 2000. That style isn’t for everyone and I think there are better long-term buy-and-hold opportunities on the London stock exchange than BP. So, I don’t see the current weakness in the share price as a buying opportunity. 

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.