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Why I’d buy the BP share price today and avoid this FTSE 250 falling knife

Shares in FTSE 100 oil and gas giant BP (LSE: BP) have recovered from the sub-500p level seen at the start of this year. Is it too late to buy? I don’t think so.

In this piece I’ll explain why I remain keen on this popular dividend stock. I’ll also take a look at a company I’ve previously admired, whose performance is now disappointing.

A safe 6% dividend

BP’s recent results showed us that underlying profits at this £109bn firm doubled to $12.7bn last year. More importantly, the company’s return on average capital employed (ROCE) rose from 5.8% to 11.2%.

Return on capital compares profits to the amount of money invested in the business. A higher ROCE is good news for investors, who want to see natural resources companies like BP focus on shareholder returns rather than growth.

Unfortunately, BP hasn’t yet reached the point where it can resume dividend growth. One reason for this is that the Gulf of Mexico disaster continues to absorb cash. Oil spill payments totalled $3.2bn last year — that’s about 15 cents per share, or roughly 35% of the current dividend.

This total is expected to fall to $2bn in 2019. BP also expects to raise cash with a further $10bn of assets sales over the next two years. Together with stable oil prices, these changes should help to cut debt. They could pave the way for a return to dividend growth.

In the meantime, BP’s payout of $0.41 per share provides a 5.8% dividend yield that looks safe to me. I’d be happy to add these shares to an income portfolio.

Down 20% as profits slump

I’ve previously been a fan of Egypt-based gold miner Centamin (LSE: CEY). Until recently, this FTSE 250 group could be trusted to report high profit margins and strong free cash flow, supporting generous dividends.

Unfortunately it’s starting to look as though these impressive performances are a thing of the past. Gold sales fell by 10% to 484,322 ounces in 2018 and pre-tax profit fell by 26% to $152.7m.

The dividend was cut by 56% from 12.5 cents per share to just 5.5 cents per share for 2018. This cut reflects a fall in free cash flow, which fell from $142m to just $63.4m.

Why I wouldn’t buy yet

From what I can see, the main issue is that ore grades are falling. This means there’s less gold in each tonne of rock that’s mined. This pushes up costs.

As you can see from these figures, costs have now risen for several years, while production has been falling:

Year

All-in sustaining cost per oz.

Annual production

2016

$694

551,036 oz

2017

$790

544,658 oz

2018

$884

472,481 oz

2019 guidance

$890-$950

490,000 – 520,000 oz

As you can see from these figures, costs are expected to rise again this year, while gold production is expected to be below 2017 levels.

Centamin remains in decent financial health and has no debt. But with the shares trading at 1.2 times their net asset value, I don’t see much point in investing until there’s some sign of improvement. Existing holders might want to hold on. But I wouldn’t buy anymore.

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Roland Head 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.