When it comes to finding FTSE 100 income stocks, investors have plenty of options. However, I think there’s one stock that could be a better income buy for your portfolio than any other blue-chip, and that’s BP (LSE: BP).
Today I’m going to be exploring why I believe this oil major has some of the best income credentials around.
Slow and steady
The first reason why is the group’s size. BP is one of the largest companies in the blue-chip index, and it is also one of the largest oil companies in the world. This size gives it the advantage of scale and the firm can cope better with downturns in the oil price than its smaller peers.
For example, when the price of oil crashed to a multi-year low in 2015/16, BP’s profit evaporated, but the company’s large, liquid balance sheet allowed it to keep its dividend steady at a time when many other smaller producers were struggling to stay alive.
The second reason why I like it as an income stock is that it produces an essential product — hydrocarbons.
Hydrocarbons like oil and gas make the world go round, and even though policymakers around the world are taking giant steps to curb the use of dirty, polluting fuels, forecasts suggest demand for oil and gas is not going to drop off a cliff any time soon. In fact, analysts don’t expect the use of fossil fuels to peak until 2023.
At the same time, BP is investing heavily in renewable energy projects. At the beginning of 2018, the firm told investors it is looking to acquire more green energy businesses and is committed to reducing its carbon footprint.
Spending on clean energy projects is only a fraction of the group’s overall capital expenditure right now, but BP is changing and I’d rather see management grow into the renewables sector slowly like this, than rushing in and possibly making a costly mistake.
As one of the world’s largest companies, and one that produces an essential product, BP is well placed to deliver returns for investors for many decades to come. And when it comes to generating profits for investors, the company has an excellent record as well.
Its profitability is tied to the oil price, which makes earnings slightly challenging to predict. However, group diversification gives it some immunity to commodity volatility as the business operates both upstream (oil production) and downstream (refining and marketing) divisions.
Income from downstream operations tends to be more predictable than oil production revenue giving management a steady stream of cash to reinvest back into the business or return to investors. When oil prices rise, BP’s investors can expect windfall profits. That’s precisely what has happened over the past 12 months. City analysts believe it will report earnings per share (EPS) growth of 65% for 2018, a tremendous comeback from 2015 when the company lost $6.5bn.
And even though oil prices have fallen back from their 2018 peak, I think the company will remain profitable in 2019. Analysts seem to agree, with an EPS target of $0.61 (up 4% year-on-year) pencilled in for this year. Analysts are also forecasting a dividend yield of 6.4% for 2019. That’s well above the FTSE 100’s current average of 4.8%.
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Rupert Hargreaves owns no share 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.