LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at BP (BP 0.13%) (BP 0.71%) to determine whether you should consider buying the shares at 430p.
I am assessing each company on several ratios:
- Price/Earnings (P/E): Does the share look good value when compared against its competitors?
- Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
- Yield: Does the share provide a solid income for investors?
- Dividend Cover: Is the dividend sustainable?
So, let's look at the numbers:
| Stock | Price | 3-yr EPS growth | Projected P/E | PEG | Yield | 3-yr dividend growth | Dividend cover |
|---|---|---|---|---|---|---|---|
| BP | 430 pence | 50% | 7.2 | 1.3 | 4.8% | -50% | 5 |
The consensus analyst estimate for next year's earnings per share is $0.99 U.S. (5.5% growth) and dividend per share is $0.36 U.S. (7.5% growth).
It should be noted that the historical figures in my table are distorted by the Gulf of Mexico disaster, while future figures and estimates are still at the mercy of possible US government litigation.
But right now at least, BP trades on a projected P/E of 7.2 and appears cheaper than its peers in the Oil & Gas Producers sector, who are currently trading on an average P/E of 9. BP's low P/E and single-digit growth rate gives a PEG ratio of 1.3, which implies the share price is appropriate for the earnings growth BP is expected to produce.
Offering a 4.8% yield, the dividend is significantly above average for the sector, with the Oil & Gas Producers sector average currently at 3%. However, BP has seen its dividend fall 50% during the last three years.
The forecast dividend is nearly three times covered, giving BP room for further payout growth. Indeed, before 2010, BP had one of the best dividend records in the FTSE 100.
BP has a low valuation and strong yield. But what about slow growth?
In my opinion, BP's slowing growth is down to the sale of assets. The firm has been selling assets to cover losses and help restructure its business following the 2010 Macondo well incident. This process is still ongoing and, after the most recent sale of the company's stake in TNK-BP, BP will have raised $35 billion.
Anyway, on the revenue side, BP's Q3 results showed higher profits from refining operations, as supply disruptions in Europe improved margins. On the other hand, profit from oil production was down 30% on last year.
However, I believe the company is seeking to curtail this decline in oil revenues, with 15 new high-value projects expected to come online by 2014.
Overall, I think the biggest problem with BP is the overhang from the Gulf of Mexico disaster. In my opinion, BP will settle claims against it, but there is still a significant amount of uncertainty surrounding the situation.
Over the past two years, BP has recovered quickly from the Macondo well disaster. The company has streamlined its business and raised a significant amount of cash to cover litigation costs. However, with uncertainty still surrounding the company, I believe now does not look to be a good time to buy BP at 430 pence.
More FTSE opportunities
Although I feel now may not be the time to buy BP, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.
The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
