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BP (LSE:BP) is facing a challenging year in 2024, with its share price down by 11% and trailing behind its index peer Shell and the FTSE 100 overall. Currently, the stock is trading at a 52-week low, prompting some to question if this could present a unique opportunity.
In terms of valuation, BP appears exceptionally attractive. The shares are trading at just under eight times forecast earnings, a figure that is notably low compared to the UK market average, which is around the mid-teens. Within the energy sector, BP’s valuation is relatively average; Shell, for instance, has a similar price-to-earnings (P/E) ratio.
This low valuation reflects broader investor sentiment towards the energy industry. A significant factor contributing to the current negative outlook is reduced demand, particularly from China, which has led to an increase in inventory levels and prompted analysts to revise their oil price forecasts for 2024 downward.
Inflation trends also play a role in this scenario. Historically, the energy sector thrives when inflation is rising, as higher prices boost revenue and profits, leading to increased investment in exploration and production. With US inflation peaking in June 2022 and subsequently declining, this could partly explain BP’s current stock struggles, even though the company surpassed market expectations for profit in its most recent quarter.
Despite these challenges, BP remains a noteworthy option due to its substantial dividend payouts. The company’s forecast dividend yield of 5.7% is notably high compared to the FTSE 100’s average yield of 3.5%, and it is expected to be more than twice covered by anticipated profits. This places BP among the top dividend payers on the index.
However, BP’s dividend history has been inconsistent, particularly during global economic downturns such as the start of the COVID-19 pandemic, when significant cuts were implemented. Despite this, recent actions, such as a 10% increase in the Q2 dividend per share and a notable reduction in debt, are positive signs.
Nevertheless, the volatility of dividend payments underscores the importance of diversification. While BP’s current dividend yield and recent performance may be appealing, it is prudent to spread investments across multiple stocks to mitigate risk and ensure a more stable return.
