I often invest with income in mind. Oil majors, despite volatility, are often my main go-to shares. With the price of crude hitting the industry hard, and after it announced poor results this week, I think now could be the perfect time to buy BP (LSE: BP) shares.
Short-term shocks, long-term investment
Contrarian investing has been an area where I often make good money. Buying shares when everyone is panicking gives lots of opportunity if you can get it right. When I look at oil prices, taking a hit because of the coronavirus pandemic, I think we have just such an opportunity again.
What has really led me to buy more BP shares however is not the potential for growth, but the high dividend yield they offer – currently more than 10% on an annual basis. Despite its poor earnings numbers, BP confirmed it would be maintaining its latest dividend. Though this could change if oil prices continue to stay low for the coming year, I think the BP dividend is a risk worth taking.
I think there may be some risk in trying to turn a quick profit in BP shares – they could still go lower yet. However, as a long-term investment, with income in mind, I think BP shares are well low enough to be interesting. If the price goes lower, I suspect I will be buying even more shares.
Why I think BP shares will go back up
A few things underpin my confidence in the company. Firstly, the current pressure is all due to low oil prices. These in turn are due to an oversupplied market and falling demand due to coronavirus. I think both of these problems will not last forever.
Coronavirus lockdowns will, of course, eventually end. Though travel attitudes may change somewhat (fewer business flights for example), the market will soon reach normal levels of demand. Likewise, though there is some oversupply at the moment, this too should fade.
OPEC is already beginning to implement production cuts. Summer in the Northern Hemisphere will soon see demand increase as everyone turns on their air conditioning.
On Tuesday the company said it would be bolstering its finances and boosting liquidity in order to lower its break-even price to $35 per barrel. While I think $50–$60 price levels will be very unlikely this year, I think $35 is very achievable.
Another aspect I like in BP shares is the confidence of investors. Admittedly the dividend has a lot to do with this. BP shares are also a mainstay of many institutional investor portfolios. Pension funds, for example, think very long term. They will be holding BP shares for decades – these oil price fluctuations will hardly register.
One can see the confidence the market has in the company after its poor earnings numbers this week. Despite announcing first quarter earnings plummeting by a third, the BP share price closed the day higher.
I do think there is growth potential in the stock right now. But even if I didn’t, the 10% dividend yield is why I just bought more BP shares.
Karl has shares in BP. 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.