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Why I’d ignore the BP share price, and its big dividends, and buy this FTSE 100 hero instead

BP (LSE: BP) remains one of the most popular dividend shares right now. That 5.7% dividend yield for 2019 is mighty appetising. Full-year financials released last week also gave the impression that the oil producer is a force to be reckoned with.

Underlying replacement cost profit ballooned to $12.7bn in 2018, from $6.1bn a year earlier, thanks to the strong crude price. Operating cash flow improved to $26.1bn from $24.1bn a year earlier, too. These numbers prompted BP to raise the full-year dividend to 40.5 US cents per share, from 40 cents earlier, and drew a line under the payout freezes of recent years.

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Sure, the energy producer has the wind in its sails right now. I’m concerned, though, that the 11% earnings rise forecast for 2019 could be chopped down as global economic growth cools and the outcome of US-Chinese trade talks remains very much up in the air. That means some downward pressure on oil prices are a strong possibility.

I’m not suggesting that BP won’t have the strength to meet this year’s forecasts. Far from it. Indeed, the extra $10bn worth of divestments it’s earmarked through the next two years should give it the base to keep paying abundant rewards. The rate at which oil production is ramping up in major regions, though, and particularly so in North America, suggests that the impressive profits more recently could be consigned to history. And with it, BP’s ability to keep forking out giant dividends.

An emerging market great

If you’re looking for a FTSE 100 stock in much better shape to thrive in the years ahead, Smith & Nephew (LSE: SN) fits the bill. And its latest trading details have bolstered my bullishness.

The medical company, a specialist in the manufacture of artificial limbs and joints, saw its sales performance gather momentum as 2018 rolled on. What was particularly impressive was its performance in emerging markets.

Underlying sales in these growth regions rose 8% last year, underpinned by strength in China and Latin America. In fact, revenues from Chinese customers surged by double-digit percentages once again. I’ve long lauded these fast-growing regions as a key reason to snap up Smith & Nephew, where rising healthcare investment is lighting a fire under demand for the company’s amazing technologies. So I’m pleased to see the Footsie firm continue to make waves here.

A sprinting share price

It wasn’t a surprise to see Smith & Nephew’s share price spring to record highs, a shade off £15.50 in the wake of the release. Its share price has vaulted 20% over the past three months and with the sales troubles of a year ago seemingly behind it, I’m expecting further heady gains through the year.

City analysts have been steadily upgrading their earnings estimates since the tail end of 2018, and an 8% rise is currently predicted. A forward P/E ratio of 26.9 times isn’t exactly cheap, sure. Though given its bright profits picture over a long time horizon — not to mention the possibility of more forecast upgrades in the weeks and months ahead — I wouldn’t consider Smith & Nephew to be excessively priced right now.

Indeed, despite this lofty valuation I’m much more attracted to the business rather than BP and its low prospective earnings multiple of 14.8 times. Clearly, the medium-to-long-term outlook here is hamstrung with uncertainty because of the twin threat of swamping supply and the rising appeal of greener energy sources. And for this reason I’m happy to steer well clear.

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Royston Wild 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.