The BP (LSE: BP) share price fell sharply as the stock market crashed to sub-5,000 levels. It has recovered from there but the fact remains that it ended March 2020 at the lowest month-end level seen since August 2015.
BP share price is at a discount
I think this is an opportunity to buy the FTSE 100 oil company’s shares at a 36% discount to the high levels at which they were trading at the start of 2020. While many FTSE 100 stocks saw a steep share price fall in the stock market crash, most have recovered much more than BP. Stocks like GlaxoSmithkline, Unilever, and Imperial Brands have all suffered, but they aren’t as far from their 2020 highs as BP.
This makes BP a more promising buy now. If I’m worried about its volatility, I shouldn’t be. Its a cyclical business, in which low phases are likely. As long as its underlying business is stable, it’s pretty much expected to ride the waves. Its long history leaves little doubt in my mind that it can.
Oil shares have also been hit by a disagreement between the two big oil producing countries – Russia and Saudi Arabia – on cuts to oil production as oil price crashes. The two have now put aside their differences, which could increase the oil price to some extent. This too could benefit the BP share price going forward.
Economy could turn around quickly
It’s unlikely to make up for the lost demand due to the recession, though. Yesterday, the International Monetary Fund (IMF) forecast that the world is headed for the “worst economic downturn since the Great Depression”. It expects the economy to contract by 3% in 2020. It’s quite obvious that this will tell on oil demand. In fact, the IMF has also sharply cut its oil price forecast. But here’s the rub.
This forecast is for one year only. In 2021, the global economy is expected to grow by a whole 5.8%. UK’s growth in 2021 is expected to increase by an impressive 4%. If the economy does in fact do a quick turnaround in 2021, all companies, including BP, will benefit. Its share price might benefit as well.
Consider BP’s high dividend yield
Further, the one big thing that makes BP attractive is its high dividend yield. At the time of writing, it’s at 10.2%. This is more than double the average dividend yield for FTSE 100 stocks. At a time when a slew of companies have cut or cancelled dividends, BP’s high yields looks particularly good. Of course it remains to be seen whether it’ll be maintained, given the pressure oil companies are under. Its first quarter results are due a few days from now. Perhaps we’ll get more insight into its dividend policy then. But for now, I’d stay invested at the very least.
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Manika Premsingh owns shares of BP. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Imperial Brands. 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.