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After its dividend cut, would I buy BP shares?

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Despite its worst quarterly results on record, BP shares managed to close up 6.5% yesterday. This bullish sentiment was brought about by slightly better than expected results, the dividend ‘only’ being cut in half and new plans of shifting away from fossil fuels. Nevertheless, despite this bounce in the share price, BP shares are still trading at a 40% discount year-to-date. Would I buy or are they still too much of a risk?

BP’s trading update

The quarterly update affirmed the oil sector’s misery. In fact, the oil major slumped to an underlying loss of $6.7bn, compared to $2.8bn profit the year before. This was largely the result of the decision to write down the value of its oil and gas exploration assets.

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Even so, as bad as this trading update was, it comes as no surprise and was actually better than many analysts had expected. Strong performance from the trading division was also very encouraging for shareholders. As a result, with oil prices already rising, I believe that the worst may be over for BP shares. This means that a recovery could be forthcoming.

The lower dividend

Along with the poor trading update, BP also announced that it was cutting its dividend in half. With the former dividend completely unsustainable in the current climate, this came as no surprise. In fact, I think that this dividend cut is a good reason for buying BP shares. This is because the preserved cash (over £3bn every year) can be used for making the transition into cleaner energy and to improve the balance sheet.

The current dividend also still yields around 6%, and this remains much larger than most other FTSE 100 companies. I personally expected a larger dividend cut, so the oil major continues to be a good income stock.

What’s next for BP shares?

One of the main reasons for the share price rise yesterday was the plan to transition to a carbon-neutral company by 2050, and a pledge to increase low-carbon investments by 1,000% by 2030. These investments should include renewable energy, bioenergy and hydrogen. The chief executive, Bernard Looney, demonstrated this commitment by promising a “decade of delivery for BP … in the fight against climate change”.

One of my main criticisms of the oil sector in general is its diminishing importance, at a time when climate change is a major issue. Consequently, I believe that this transition to greener energy is an excellent move for BP, and one that puts it ahead of its rivals.

All in all, I’d buy BP shares at the current price. Although net debt of $41bn is a major worry, I’m very encouraged by the decision to transition into greener energy. As a result, as long as it’s part of a diversified portfolio, I believe that BP could be a very good buy.

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Stuart Blair 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.