If you’ve not already invested in the BP (LSE:BP) share price, or if you’ve already made the choice and want to increase your holdings, I think now is a brilliant time to buy.
Based on the cash flows the energy giant is generating, I see the the BP share price as significantly undervalued.
A trailing price-to-earnings ratio of 13.75 for BP appears to be a useful value signal, to me anyway. And Q3 results that came out on 30 October make this case extremely well.
Value for money
The FTSE 100 stalwart delivered strong cash flow and underlying earnings and yet the share price dipped. Why? Because the market deals in short-termism. Thankfully, investors like you and I can benefit from an unwarranted sell-off of this good value share.
The current BP share price of around 498p is very close to its 52-week low of 479p, which is usually a good marker of a solid buy-in point.
Lower oil and gas prices contributed to a dip in net profits across the quarter. But BP is resilient. Some $6.5bn of underlying operating cash flow speaks to the strength of this globally-diversified business. CEO Bob Dudley made the point that expansion is continuing apace, telling the market: “We’re continuing to advance our strategy, making strong progress with our divestment plans and building exciting new opportunities in fast-growing downstream markets in Asia.“
When you get to be the size of a company like BP, innovation can tend to take a back seat as all the effort goes into maintaining the status quo.
Happily, management knows which way the wind is blowing and is investing heavily in renewables. Another keen favourite of mine, the 7.4% yielding retirement-friendly FTSE 100 dividend stock SSE, has also made this move.
BP subsidiary Lightsource signed on to major solar projects in Brazil earlier this year. South America, for all its oil wealth, has been slow in recognising the commercial potential of sustainable energy generation, but that tide is turning and BP could be set to profit from that in the future.
For example, according to BP’s major 2019 statistical review, Argentina’s renewable energy generation spiked by 131% last year and Colombia rocketed to 1,314% growth over the same period.
I’m pleased Bob Dudley sees the same future in renewables that the UK government does: its landmark 2050 net neutral carbon pledge is legally-binding, after all, and other world governments are starting to follow suit.
Get paid 6%
A tidy 6.2% dividend for holding BP stock will repay your faith again and again, especially since the longer-term outlook is good.
Based on estimates from a score of City analysts, BP is expected to grow future earnings by over 11.5%, from 8.7bn in the 2019 year-end results, to £10.9bn in 2020.
I believe those full-year results will deliver much rosier news for shareholders, given BP’s free cash position right now.
As value investors we have to keep our eyes on the horizon and watch out for good entry points if we’re going to make ourselves richer with FTSE 100 dividend shares. Overpaying, even for high-quality businesses, just won’t do. That’s why I say now is the right time to get in on the BP share price.
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Tom currently has no position in 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.