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ISA investors! Is the BP share price (and its 7.7% yield) too good to miss?

There hasn’t been a significant improvement in market confidence, but the FTSE 100 is on its third straight day of gains. This isn’t a massive surprise. Sure, concerns over the coronavirus continue to command investor attention. But with many UK blue-chips looking significantly undervalued following recent heavy falls, the dip buyers are tentatively venturing from their foxholes.

I certainly wouldn’t advise prospective dip buyers to pile into BP (LSE: BP), however. It may have bounced from levels not seen since June 2016 below 400p per share. But there are plenty of chances for it to sink again as commentators slash their oil demand forecasts in the wake of the outbreak.

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Demand going down?

The boffins at Morgan Stanley are the latest to hack down their estimates. On Tuesday, they reduced their 2020 demand expectations to 500,000 barrels per day from 800,000 barrels previously. The broker also reduced its Brent price forecasts for the second quarter, to $55 a barrel from $57.50 previously.

More reductions on either front can’t be ruled out either, and not only on account of any worsening in the coronavirus tragedy. Any flare-up of the US-Chinese trade wars that hampered global growth last year, allied with key European economies moving into recession, could also muddy the demand outlook. That’s even if the OPEC+ group of countries, as expected, reduces supply levels to aid the market balance.

City analysts are suggesting that BP’s annual earnings will swell 159% in 2020. Clearly it’s a forecast that is in danger of significant downgrades should one or more of the above issues smack global growth. Therefore not even the company’s low forward P/E ratio of 10.6 times is enough to tempt me in.

Dividend in danger

I also fear that predictions of another total dividend of 41 US cents per share in 2020 could fall flat. Firstly, the current projection is covered just 1.2 times by predicted earnings, well below the widely-accepted security watermark of 2 times. And as I say, that’s an earnings consensus in danger of serious reductions as the year progresses.

BP is unlikely to have the balance sheet strength to keep paying juicy dividends. Net debt continued to climb in 2019, despite the impact of divestments, rising $2.1bn year-on-year to stand at $45.4bn as of December.

The oil mega-giant has designs to pull its gearing ratio down in the medium term too. It’s targeting a figure of between 20% and 30% by 2021, down from 31.1% last year. BP’s clearly not a million miles away from its goal, but in an environment of declining energy prices, something may have to give. And it could well be the dividend.

This is why the Footsie firm’s colossal 7.7% dividend yield for 2020 holds little appeal for me. It may obliterate the broader forward average of just above 4% for Britain’s blue-chips. But the company’s high risk profile means I’d much rather invest in one of the index’s other big-paying dividend stocks.

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Royston Wild 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.