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How the BP share price can help you beat the State Pension and retire early

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If you’re building a pension pot, I don’t think you can go wrong by including BP (LSE: BP)

This world-class oil company is undoubtedly one of the best income stocks in the FTSE 100 and that, in my opinion, implies that by owning the shares can help you beat the State Pension and possibly even retire early if you manage to save enough.

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Today I’m going to explain why I hold this view, and how you can make the most of the BP share price.

Oil income

Over the past few years, many investors and analysts have speculated that BP’s dividend could be for the chop following the collapse and subsequent slow recovery of the price of oil. However, the company has surpassed all expectations and it looks as if the payout is now safer than it has ever been before. 

I think management deserves all the credit for the company’s profit recovery. When the price of oil collapsed, CEO Bob Dudley and team didn’t waste any time. They acted almost immediately to start cutting costs and mothballed any expensive capital projects. The result of these efforts is now quite clear. Even though the price of oil only briefly moved above $80 a barrel in 2018, BP managed to earn $12.7bn of profits in 2018, as high as when oil was trading closer to $100 a barrel. It made $6.2bn in 2017. 

More than doubling profits year-on-year is quite incredible. A higher oil price did help, but efforts to reduce costs and improve efficiency across the business had more of an impact.

Building the business

BP’s output was boosted by the company’s decision to buy the US shale assets of BHP — its most significant acquisition in 20 years. 

The deal means the firm ended the year with $44.1bn of debt, which is troubling, but management is planning to offload up to $6bn of assets to help reduce liabilities. On top of this, current levels of production are generating $6.8bn of operating cash flow every quarter. According to my calculations, that is enough cash to maintain the company’s dividend at its current level, invest in new projects and reduce debt.

What’s more, BP is planning for a future of $60 to $65 a barrel oil, not $80, which further reinforces my belief that not only can BP sustain its current level of debt, but that the dividend will be safe for many years as well.

Pension champion 

Considering all of the above, BP’s current dividend yield of 5.7% is highly attractive to me, and I’m planning on adding the stock to my retirement portfolio shortly.

My numbers show that even if shares in the company go nowhere over the next 30 years, I will need to invest just £300 a month for the next three decades to build a pension pot worth £285,000. 

As I have explained before, a pension pot of around £250,000 is required to double your state pension in retirement. According to these figures, BP can help you do just that.

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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.

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