BP’s (LSE: BP.) share price has taken a hit. Since late March, it’s fallen from above 600p to near 480p – a decline of around 20%.
Could the shares be worth a look after this pullback? Potentially – here are two reasons why.
A dividend yield above 5%
Let me start by saying that investing in oil stocks can be tricky. With these, it’s very hard to make forecasts for revenues and earnings because oil prices fluctuate significantly.
After BP’s recent 20% drop however, I can definitely see some appeal in the shares. For the start, there’s the dividend yield. This is now back over 5%. That’s above the FTSE 100 average and higher than the interest rates that most high-interest savings accounts in the UK are paying.
So the shares could be a decent source of passive income. Especially if held inside a Stocks and Shares ISA where there’s no tax on income from investments.
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A hedge against uncertainty
Secondly, there’s the fact that they can act as a hedge against geopolitical flare-ups. If we were to see the situation in the Middle East escalate, oil prices might rise. This could lead to gains for the BP share price while other stocks fall due to uncertainty. So they could play a valuable defensive role in a portfolio, even though energy hasn’t traditionally been a defensive sector.
It’s worth pointing out that the shares could also be a good hedge against a tech sector meltdown. Because they have a low correlation with a lot of technology shares, meaning that they don’t move in sync with them.
Looking at the correlation between Nvidia and BP, for example, it’s close to zero over the last year. This tells us that the share price movements of Nvidia and BP have been independent of each other.
The bear case
Now, of course, there are plenty of risks here. As I mentioned above, oil company revenues and earnings are notoriously unpredictable. So while the shares look cheap today, there’s the possibility of further weakness. If oil prices head lower from here, the BP share price may follow.
There’s also uncertainty around the global shift to clean energy. Here, BP’s actively backing away from its move towards renewables.
Finally, there’s a bit of uncertainty in relation to the leadership team. This has seen a high level of turnover, with Meg O’Neill joining as CEO in April and chair Albert Manifold dismissed in May.
Even better opportunities?
Overall though, I see appeal in the shares at current levels. With a 5% dividend yield and some potential defensive attributes, there’s certainly a case for their consideration.
That said, there are a lot of other interesting opportunities in the market right now, both from a growth and an income investing perspective. So BP isn’t the only stock to consider buying.
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Edward Sheldon owns shares in Nvidia
