BP (LSE: BP) shares spiked with the oil price at the start of the Gaza crisis but have retreated as the conflict seems contained, for now. They’re now 11% cheaper than a month ago and down 2.72% over 12 months. This looks like a tempting entry point.
BP is one of the best income growth stocks on the entire FTSE 100, with a long-term track record of rewarding investors with dividends and share buybacks. If I went all in on BP shares I could generate a solid, rising income in one fell swoop.
Should I go all in?
No sensible investor would put every penny into a single stock. Yet the world still runs on oil and gas – even if we wish it didn’t – and when it finally runs on renewables there’s a fair chance BP will be there, having used its fossil fuel revenues to fund the transition.
Also, it’s cheap. Its shares trade at just 6.01 times forecast earnings for 2023. They’ve fallen with the oil price, as Brent crude dips below $80 a barrel. BP can make money with oil at $40 a barrel, so that’s nothing to worry about. Plus there’s a strong argument for buying when sentiment is down, as its share price tends to be cyclical.
BP investors can expect some share price volatility this week, as the world awaits the outcome of postponed OPEC+ meeting. If the group cuts output, oil and BP could get a lift.
Q3 results, published on 31 October, reflected a more buoyant oil price with underlying profits up 27% to $3.3bn. BP completed $2bn of share buybacks and announced another $1.5bn for Q4.
It’s a personal thing, but I prefer dividends to share buybacks, as the results are more visible in my trading account. BP’s board has it the other way around though, and remains committed to using 60% of 2023 surplus cash flow for share buybacks.
That’s a big leap
That does somewhat undermine my idea of living off the income, although the forecast dividend is still 4.69% for 2023, rising to 5.03% for 2024.
The Pensions and Lifetime Savings Association reckons a single person needs £23,300 a year to achieve the ‘minimum’ retirement living standard. The new State Pension currently pays up to £10,600. Let’s say I generate the remaining £12,700 from BP shares. The forecast dividend per share for 2023 is 22.55p. Based on that, I’d need 56,319 shares to hit my income target.
At today’s price of around 475p, that would cost me £267,515. Sadly, that’s way beyond my pocket. It would leave my portfolio horribly unbalanced.
I still like BP though. Having rebased its dividend from 41p in 2019 to 22p in 2021, it’s now rising again. The board also paid down another $1.3bn of net debt in Q3, reducing the total to $22.3bn.
The big immediate risk is that the world tips into recession. Either way, Q4 results will be worse than Q3’s because of the oil price dip. Net zero remains a threat, as the world looks to wean itself off the very substance that has made BP the giant it is today.
I’ll happily invest £5k in BP shares (not £267k!) once I have the cash to spare. I wouldn’t base my entire retirement on it though.
