When a stock doesn’t experience much capital growth, it makes me wonder what’s going on, and whether it is a good investment. In the case of the BP (LSE: BP.) share price, I reckon it definitely is.
Here’s why I’d love to buy some shares when I next have some spare cash to invest.
What’s happening?
It’s perhaps a slight surprise to see BP shares stagnate, especially as it is one of the largest oil and gas businesses in the world
Over a 12-month period, BP shares are down 1% from 460p at this time last year, to current levels of 454p.
Looking back even further, the shares are down 16% over a five-year period from 546p in July 2019, to current levels. In fact, the shares have remained pretty stagnant since the early 2000s.
Digging deeper
For me, the BP share price is just the tip of the iceberg. It doesn’t really provide the full picture of what still looks like a top stock to buy.
It’s hard to ignore BP’s previous track record, its enviable market position, as well as future prospects. However, it’s worth remembering that past performance is never a guarantee of the future.
BP has been a firm-favourite among many investors for years due to the firm’s stellar reputation for shareholder value and returns. With such strong earnings, profits, and growth, the business has grown dividends for a number of years. This is one of the big reasons I’d look past the lack of capital growth.
At present, the shares offer a dividend yield of 5%. For context, this is higher than the FTSE 100 average of 3.9%. However, I do understand that dividends are never guaranteed.
Furthermore, BP shares currently look good value for money, if you ask me. They trade on a forward price-to-earnings ratio of just over seven. This is lower than the industry average – closer to eight – and below the FTSE 100 index average of 12.
Risks and final thoughts
There are bullish aspects that worry me. For starters, a recent trading update mentioned earnings will be less than previously forecast. As BP’s dividend is its most attractive trait for me, I can’t help but wonder if lower-than-expected earnings mean returns could be impacted here.
Another risk I’ll keep an eye on is that of the move away from traditional fossil fuels, which are BP’s bread and butter. The firm needs to move towards greener alternatives. BP actually decided to scale back its plans for this according to its recent update. This could be a reason why the share price has been down in the past week or so.
The rise of ESG investing could have prompted a negative reaction to this news. Furthermore, the hefty investment that will be required for the transition to net zero ambitions could hamper shareholder returns too.
I’m smart enough to understand that energy stocks like BP come with cyclical risks. However, despite a lack of capital growth, BP shares still look like a good buy for me and my holdings to bag juicy dividends.
This post was originally published on Motley Fool
