Shares in both Shell (LSE: SHEL) and BP (LSE: BP.) have tanked. With oil prices normalising amid an easing of geopolitical tensions, we’ve seen share price declines of around 20% for both oil majors.
Could now be the time to consider buying these blue-chip stocks for an ISA or Self-Invested Personal Pension (SIPP) given that they’ve come down significantly in price? Let’s discuss.
Attractive levels of dividend income
Looking at these names today, I can definitely see some appeal. For a start, we now have much higher dividend yields than we had a few months ago when their share prices were at elevated levels.
At present, the consensus dividend forecasts for 2026 are:
- Shell: $1.63 per share
- BP: $0.338 per share
At current share prices, these forecasts translate to yields of 4.2% and 5.5%. So these shares could be a nice source of passive income.
It’s worth noting here that dividend coverage, or the ratio of earnings per share to dividends per share, is very high for both stocks. This suggests that there’s minimal chance of a dividend cut in the near term.
Low valuations
Second, we have attractive valuations. Looking at earnings forecasts, Shell’s trading on a forward-looking price-to-earnings (P/E) ratio of 7.7 while BP’s on 7.1.
Now, I’ll point out that for oil companies, the P/E ratio isn’t the greatest indicator of value because earnings (the E in P/E) tend to be both volatile and unpredictable. Still, there appears to be some value on offer today.
A defensive hedge
One other thing I like about these stocks is that they can be a good hedge against geopolitical uncertainty and/or rising oil prices. This was illustrated earlier in the year when the US/Iran conflict kicked off.
While other areas of the market fell, Shell and BP shares surged. So they could potentially play a valuable role in a portfolio as defensive assets.
The risks
On the downside, there’s the volatility and unpredictability of earnings I mentioned above. With these companies, revenues and profits are closely linked to oil prices and these can swing wildly.
If oil prices were to continue falling, we could see weakness in the two companies’ share prices. This could offset any dividend income received.
Another risk to consider is the global shift to renewable energy. This could impact demand for oil in the long run.
Note that while Shell and BP have maintained their net-zero by 2050 pledges, both companies have made major strategic moves away from rapid renewable energy expansion in recent years. In other words, their fossil fuel operations are the priority.
My call
So are they worth considering? I think so – mainly as defensive dividend stocks.
That said, they’re not the first shares I’ll buy when looking to deploy capital at the moment. In my view, there are more compelling opportunities to consider in the market at present.
Should you invest £5,000 in Bp P.l.c. right now?
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Edward Sheldon does not hold any positions in the companies mentioned
