When it comes to finding dividend stocks, I think it’s hard to beat the BP (LSE: BP) share price. The company has almost everything going for it. It has a portfolio of some of the world’s best oil and gas assets, cash generation is strong, and the firm has a well-developed hydrocarbon distribution network around the world.
More importantly, unlike so many other companies, BP doesn’t have to try to reinvent itself every few years. Indeed, one of the biggest problems companies face is trying to stay relevant over the long-term. This means investing millions or even hundreds of millions of pounds in research and development and new capital projects. All BP has to do is find oil and get it out of the group which, granted, isn’t that easy, but it’s easier than trying to predict the next consumer trend or invent the next miracle drug.
That said, one threat we can’t ignore is BP’s business model, from the global transition away from dirty, polluting fossil fuels like oil and gas, towards cleaner renewable energy.
According to BP’s forecasts, demand for oil and gas will continue to expand until around 2035, and then level off from there. This implies that the company will still be able to reap (and distribute to investors) the rewards of producing oil and gas. But the group is also trying to grow its presence in the renewable energy space — it’s not resting on its laurels — which I believe is a sensible move, considering the way the world is heading.
Slow and steady
As I’ve explained above, the main reason why I believe BP could be the FTSE 100 buy of the decade is its predictable business model. This means management can concentrate on other things like improving efficiency, profit margins and cash returns to investors.
BP is already one of the FTSE 100’s top income-producing equities. It currently has a dividend yield of 6.1%, and the distribution is covered 1.5 times by earnings per share.
There’s much more to BP’s cash returns policy than just its dividend. The firm is also forking out billions to buy back its own shares, which will reduce the number in issue, pushing up earnings per share, and ultimately, the share price.
According to my figures, the amount of money BP is currently spending on buybacks is equivalent to a buyback yield of 0.5%. When added to the dividend yield, this gives a total yield for investors of around 6.6%.
Investing for the long term
Unfortunately, because the company forked out $10.5bn to buy a string of producing assets across the US from BHP in the middle of last year, management has informed shareholders that buybacks will take a back seat in 2019 as the firm devotes all available funds to reducing debt.
Still, over the long term, these new assets should only lead to improved cash generation, which will ultimately mean higher cash returns for investors when the borrowings used to fund the deal are paid off.
These are just some of the reasons why I believe the BP share price is the FTSE 100 buy of the decade.
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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.