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Here’s why I think you can retire on the BP share price

Shares in oil giant BP (LSE: BP) currently offer a desirable dividend yield of 6.7%. The payout is covered 1.3 times by earnings per share, and BP has a history of returning additional cash to investors with stock buybacks. 

BP’s cash returns to investors have made the firm one of the most sought after dividend stocks in the FTSE 100. However, the company is facing an uncertain future. The world is looking to move away from dirty fossil fuels as it attempts to bring climate change under control. This means companies like BP now face difficult choices.

BP spends nearly $20bn every year developing and discovering new oil prospects. There’s now a growing risk this spending could be for nothing if oil & gas demand drops to zero. 

Stranded assets 

Critics of the oil & gas industry claim the sector is at risk of owning hundreds of billions of dollars of so-called stranded assets. These are assets that will have no commercial use in a world where there’s no demand for hydrocarbon fuels. 

In my opinion, this is highly unlikely. While the electric car market is booming, the oil market is still expanding. Forecasters don’t expect demand to start falling until 2030 at the earliest. Even then, it’s likely oil giants such as BP will be able to survive much longer than their smaller peers. 

Nevertheless, BP is well aware it needs to change or be left behind. The company published a report earlier this year claiming renewable energy will be the world’s primary power source by 2040, and management is acting on the predictions.

So far this year, the company has accelerated the rollout of its UK network of electric car chargers and invested $30m into Calysta, a start-up that is trying to reduce carbon emissions produced in the agriculture and aquaculture market. 

On top of this, BP’s Lightsource solar business has inked deals to acquire “approximately two gigawatts of greenfield solar projects at various development stages across Brazil.” The oil group is looking to invest $200m in Lightsource over the next three years.

And finally, earlier this year, BP announced it has agreed to combine its Brazilian biofuels and biopower business with that of Bunge. The deal will form a new equally-owned joint venture, BP Bunge Bioenergia, increasing the size of the oil group’s biofuels business by 50%. 

These efforts are still only a small part of the whole BP group, but there’s no denying the company is moving in the right direction. What’s more, I think its slow and steady approach is the right one for investors. It means the business is making the right decisions without wasting money on vanity projects. 

The bottom line 

So overall, there’s no denying the world is changing and BP will have to overcome some serious challenges over the next few decades. The good news is that the business is moving in the right direction, and management’s efforts to prepare the company for the future while maintaining shareholder payouts implies the business can continue to pay investors for many decades to come.

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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.