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Should I buy shares in BP and BT for my ISA?

We’re only in the first month of the new 2019/20 ISA allowance, but if you want to use up as much of the £20,000 maximum that you can, it’s never too soon to start.

Today, I’m looking at BP (LSE: BP) and BT Group (LSE: BT.A) and asking whether I’d buy them for my ISA. My answer is yes and maybe, respectively. Let me explain why.

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Forget oil prices

Over the past few years, oil investors have been almost singularly focused on the price of a barrel. And I recently explained why I think BP shares are cheap, now that the price is recovering.

But when it comes to buying an oil giant like BP for your ISA, I reckon the oil price should play no real part in your decision. Because of the tax advantages, the shares I’ll select for an ISA (or SIPP) have always been ones with the longest of long-term views.

If you’re looking at a smaller oily whose long-term prospects could be damaged by short-term oil price fluctuations, I’d argue they shouldn’t be going anywhere near your ISA. But whenever it heads up or down due to short-term concerns, the oil price will always revert to a profitable level in the long term — it has to, or whole countries will go bust.

Dividend consistency is also something I look for in an ISA stock, and BP scores nicely on that count — though not as impressively as Royal Dutch Shell, which has never cut its dividend since World War II. BP’s dividend was suspended due to the Deepwater Horizon disaster, but it very quickly regained its strength, and we’ve been looking at yields of 5%-6% over the past few years. BP is a definite yes for me.

Beware debt

At the third-quarter stage at 31 December, BT was sitting on adjusted net debt of £11.11bn, up from £8.92bn a year ago. At 1.5 times estimated full-year EBITDA (annualised from the nine-month figure of £5.55bn), it’s not outrageous.

But then there’s the pension fund deficit, estimated at £5bn at 31 December — up from £4.5bn at 30 September, so it’s going in the wrong direction. If we add that to the debt figure, the total comes close to 2.2 times EBITDA, and that’s surely stretching things.

But one reason for optimism is that, even with the twin afflictions of debt and deficit, BT has been keeping its dividend payments going. And the share price has plummeted over the past few years, losing more than half its value since the end of October 2015.

That’s boosted the dividend yield to nearly 7% and pushed the P/E down as low as 8.5, and that sort of valuation might be a good one even with the debt and deficit problems.

The other plus point for BT, for me, is the company’s restructuring strategy which continues under new boss Philip Jansen. We haven’t seen a quarterly report under Jansen yet, as Gavin Patterson was still in the hot seat at Q3 time, but full-year results are due on 10 May. I’ll wait until I see those.

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Alan Oscroft 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.

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