The BP (LSE: BP) share price has been rising lately, and that’s good news for me because I’ve been busily loading up on its shares.
I decided they were too cheap to ignore, with a price-to-earnings (P/E) ratio of around six. That’s a fraction of the average FTSE 100 P/E of just over 15 times.
At the same time, BP shares offered an unmissable 6% yield coupled with plentiful share buybacks. Typically $3bn a quarter.
The clincher is that the oil price was down in the dumps at around $70 a barrel. If it rose from that reduced base, BP shares would surely follow, and that’s largely what’s happened.
Can this FTSE 100 dividend king fight back?
As I write, Brent crude trades at just over $78 a barrel, although that has slipped slightly from $80 in recent days.
On the face of it, I’ve locked into a top UK blue-chip at a bargain price, and can look forward to years of high and rising dividends. Plus more buybacks and with luck bags of share price growth too.
Sadly, investing isn’t that simple. As with every stock, BP faces a world of risk, only more so.
First, the oil price could drop. If that happens, BP shares are likely to drop too. Anything from worries over peak Chinese demand to oversupply triggered by US President Donald Trump’s “drill, baby drill” energy policy could hit revenues and profitability. As could disappointing global economic growth. Or a shift in Saudi policy. Threats everywhere.
I’m also concerned by reports that big oil producers are borrowing money to fund those share buybacks, as they battle to keep investors happy. That doesn’t seem a sustainable strategy.
BP is still struggling to navigate the energy transition, and has come under fire for cleaving too closely to its fossil fuels heritage. There’s no easy answer here. Pouring money into renewables is costly and uncertain. Sticking to oil and gas is risky too. I’ve no idea what the answer is, but there’s a risk of BP choosing the wrong path.
Stop worrying and reinvest the income
There are broader ‘Black Swan’ risks, such as potential oil spills, Middle Eastern unrest or a breakthrough in alternative energy technologies, such as hydrogen or nuclear fusion.
None of this is easy to predict, in a world that swung from worrying about ‘peak oil’ then ‘peak demand’ and back again, in a matter of years.
Despite these concerns, and the nagging feeling that I’m doing wrong by the planet, I’m sticking with my decision to invest in BP shares.
The risks I’ve listed are reflected in that low valuation. Some of my share price worries are offset by that high yield.
Also, I didn’t have any direct exposure to the energy sector. Since I believe in diversification, that felt like a serious omission.
I have no idea what will happen to BP next. Nobody does. But I do believe that buying and holding a diversified spread of dividend-paying blue-chips should help me build my wealth in the longer run, so long as I can stand the short-term volatility. And it makes sense to buy when they’re cheap. At today’s low price, I couldn’t resist BP.
This post was originally published on Motley Fool
