At 6.3%, BP (LSE: BP) is one of the highest-yielding dividend stocks in oil and gas right now. Shell is slightly higher, at the time of writing. However, BP’s dividend yield has a better chance of rising considering its two-year $10 billion divestment programme to strengthen its balance sheet and pursue new business opportunities.
In spite of that, at a 10.8× forward price-to-earnings (P/E) ratio, the stock is currently undervalued I believe. An investment in BP, therefore, is an investment in a robust dividend-paying stock that is discounted by negative market sentiment. As a result, it offers the dual benefits of a stable dividend and a high upside potential in the share price.
Everyone runs into debt sometimes
Presently, the greatest concern investors might have about BP is its high debt. It is currently operating at a debt-to-capital ratio of 43%. But the company has been making efforts to divest billions of assets and optimise its capital expenditure (capex). Thus, soon, it will be sitting on tonnes of cash to offset much of its debt.
However, we should be aware that BP is not the only highly leveraged company among its peers. There is Shell, with a debt-to-capital ratio of 32%, too. Even ExxonMobil has 19%. Evidently, everyone runs into debt sometimes, and BP isn’t an exception.
BP is divesting and optimising its capex
Perhaps the most notable of BP’s strategic efforts is its divestment and capital expenditure optimisation. These two are geared towards reducing its debt profile and ensuring constant liquidity. Therefore, the energy giant will always have sufficient cash flow for dividend and more.
Moreover, BP’s upstream expansion projects have been undeterred. The company has embarked on the construction of a diversified portfolio of projects, underpinning high-quality growth to 2021 and beyond. Since 2016, this strategic plan has resulted in the development of over 23 upstream projects.
Why BP is a buy for me
BP is a buy, in my opinion. Apart from its significant debt, it has more going for it than it has going against it. For example, the company is making conscious efforts to stem the tide of debt. For example, it intends to divest over $10 billion worth of assets over two years — 2019 and 2020 — an action that will help to free up cash for debt repayment.
With a robust upstream portfolio, BP is well poised to tremendously profit from any possible increase in oil price. Add to that its current low valuation of 10.8× its forward P/E ratio – only Shell is lower in the industry…
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Pi De Jonge 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.