Private investors are betting heavily on the BP (LSE:BP) share price bouncing back. The energy supermajor still remains one of the most bought and sold FTSE 100 shares.
But seeing BP lose over half its value in less than nine months has been a crushing blow to shareholders. So with the BP share price now near a 26-year low is it still a solid long-term buy?
I’ll attempt to answer that question today.
BP share price yield
Pre-pandemic, there were few better FTSE 100 options on the table than BP. The BP share price offered a whopping 10% yield. This was by far the biggest dividend income of the most popular FTSE 100 shares.
But the danger in chasing double-digit yields was writ large in August 2020.
Wth the Covid-19 health crisis raging, and demand for oil at an all-time low, chief executive Bernard Looney took the tough decision to cut BP’s dividend per share in half. This is not a decision that is ever made lightly.
Millions of investors worldwide rely on BP dividends. But payouts come out of company profits. So if a business thinks it’s likely to make less surplus cash? There is a good argument for temporarily reducing these payments.
The announcement of BP’s massive strategy switch away from oil and towards renewables also came as a surprise to the market. Delivering surprises is something that should be reserved for birthdays and Christmas, not dependable FTSE 100 companies.
Where BP dividend goes now
Looney says the BP quarterly dividend of $0.0525 — about 4p per share — is now the baseline. So those 10% yields won’t return in the foreseeable future. Instead of expecting $0.40 per share (about 31p), BP shareholders will instead have to deal with annual dividend yields of half that amount, closer to 15.5p per share. At today’s share price around 230p, that still represents a pretty outsize 6.7% yield.
The company has also committed to return “at least 60% of surplus cash as share buybacks” over the next 10 years. In theory, this move should push up the BP share price. Reducing the number of available shares on the market increases the value of those held by current shareholders. It’s a theory that’s worked in the past and I think it could easily do so again.
What the future holds
Looney intends by 2030 for BP to be investing $5bn a year in renewables, some 10 times the current amount. Over the same period BP’s oil and gas production should drop by 40%.
I think there’s ample profit to be made in renewable energy. Especially with BP now breaking UK records with its electric vehicle charging infrastructure deals. And the large investments it is making in industrial hydrogen with Danish multinational Ørsted will do the shares no harm at all.
City broker Morgan Stanley agrees. Having looked at the BP share price in November here is what its analysts think. While there remain questions about the FTSE 100 firm’s cash flow outlook, “following underperformance and its yield expanding, we suspect these factors are discounted”.
In other words, the BP share price drop is overdone and its 6.7% yield remains very attractive. That’s my view too.
TomRodgers 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.