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BP and Royal Dutch Shell are rising! Should I buy these FTSE 100 stocks today?

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What a month it has been for FTSE 100 stocks BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). The BP share price is up 35% in that time, while the Shell share price has soared 50%. That’s quite a comeback.

This underlines why we at the Motley Fool urge investors to buy shares in top FTSE 100 stocks after markets have sold off. If you pick your targets carefully, you can reap the rewards when shares bounce back, as history suggests they always do. So would I buy BP and Shell today?

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In contrast to most FTSE 100 stocks, the BP share price is still trading at similar levels to the March meltdown. While global equities recovered thanks to monetary stimulus, the continuing low oil price has held BP back. Management faces a second challenge, convincing markets that it can make the leap to a low-carbon world.

BP and Royal Dutch Shell still have a role to play

Covid and carbon forced BP to halve its dividend in August, as last year’s Q2 profits of $2.8bn turned into a $6.7bn loss, mostly due to hefty write-offs. At least Q3 was better, with a tiny profit (by BP’s standards) of $100m.

Few investors will be complaining about the dividend, given that BP still offers a forecast yield of 8.4%, far higher than most FTSE 100 stocks these days. It does look a little expensive, though, trading at 17.6 times earnings.

Covid and carbon also combined to force Royal Dutch Shell to cut $22bn from the value of its oil and gas assets in June. It had previously slashed its dividend by two-thirds to 16 cents. Happily, it increased the payout last month, although only to 16.65 cents. Investors get a forecast yield of 4.2%, which is lower than BP’s. Shell is cheaper, trading at 8.8 times earnings, although with those earnings forecast to drop heavily next year, the forward valuation jumps up to 24 times. Neither of these two FTSE 100 stocks are the bargains they were recently.

I’d buy these top FTSE 100 stocks for income

At least Shell is making profits, some $955 in Q3. This thrashed analyst forecasts of $146m, but don’t get too excited. It is a trifle against last year’s $4.76bn.

Investing in BP and Shell is a much bigger gamble than it used to be, when the world ran on oil and renewables were a pipe dream, but I still think it is one worth taking. First, these FTSE 100 stocks should continue to benefit if the oil price continues to recover, as I think it will if the vaccines do their work. People will be desperate to get on the move again.

The shift to renewables is a threat, but BP and Shell have now woken up to it. The transformation will be costly, and success is not guaranteed, but at least they can fund the transition (to renewables) by using the cash flows generated by fossil fuels

As someone who likes to invest in FTSE 100 stocks for income, I would still buy shares in BP and Royal Dutch Shell today.

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Harvey Jones 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.

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