Wednesday 29 January 2014

BUY: BP...Oil and Dividend Giant at a Discount

Price: 478.86
Shares: 100
Projected annual dividend income: £22.32

I can't imagine there are many portfolios--especially amongst individual investors--that do not include an oil giant. Demand for oil remains ubiquitous in our society and does not appear likely to abate anytime soon. As such, I was hoping to get an oil giant into my portfolio very early in order to tap into their notorious dividend records.

So why did I choose BP over that other FTSE 100 giant, Shell? Partly because I felt that BP was still being overlooked due to the fallout from the Deepwater Horizon spill. What is more, because I feel this disaster has forced BP to respond in positive ways including streamlining and safeguarding assets. What is more, the underlying figures still look excellent.

Excellent Forward Price to Earnings Figures

The predicted earnings per share (EPS) figures set out by analysts appear very buoyant towards BP. The consensus suggests a P/E ratio of 9.9--below the magic bargain number of 10. What is more, even when considering the spread of analyst predictions BP looks a bargain at current prices. For 2014 they look like this:

EPSP/E Ratio
Difference (%)33.73

Even if we suppose the lowest EPS predicted by analysts BP is still on a forward P/E of only 11.4. That is still a very healthy figure.

Heading into 2015 the consensus is still a friendly P/E of 9.42--again below the magic 10. 

EPSP/E Ratio
Difference (%)49.94

The lowest EPS prediction for 2015, however, does suggest some scepticism with regards to potential earnings with it being lower than the lowest prediction of 2014. But even here the P/E remains at 12.09--again still a reasonable figure.

Superb Dividend Projections and Cover

What is more, the all important dividend situation looks superb going forward as well. Analysts predict a dividend of 23.57p and 24.79p for 2014 and 2015. This is a yield of 4.92% and 5.18%. 

Furthermore, even with the lowest EPS predictions this provides a dividend cover of 1.78 times and 1.6 times earning for 2014 and 2015. For me, anything about 1.6 times earnings is healthy and anything over 2 times earning is excellent. As such, I feel pretty confident about BPs ability to cover its dividend payments going forward.

Still has issues, of course

Naturally, I am still keeping an eye out for further repercussions from the Deepwater Horizon disaster. But I think the worst is behind BP and certainly, thinking long-term, I see BPs becoming a very healthy and valuable addition to my portfolio as time passes.

What is more, I am hoping as time goes on to shift away from oil giants like BP and Shell towards greener alternatives.

Which oil giant do you prefer for the future, BP or Shell? What green alternatives to BP and Shell do you favour?

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