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I BP (LSE: BP) share price is having a tough time. Down 11% in 2024 year to date, the big oiler has underperformed its target A shell. It's late FTSE 100 again.
Things got so bad that the stock is sitting at a 52-week low. But is this an opportunity to miss?
Dirt cheap stocks
Based on calculations alone, BP for sure you look as a bargain at first. Right now, I can pick up a piece of one of the UK's biggest companies at eight times forecast earnings. That's dirt cheap relative to the rest of the UK market where the average is in the mid-teens.
Then again, it's actually an average within the energy sector. The aforementioned Shell, for example, trades at a price-to-earnings (P/E) ratio of eight.
To me, this says more about how investors feel about the industry in general.
Low demand
Much of the gloom is likely due to a drop in demand, particularly in China. Rising inventory levels also pushed analysts to lower their 2024 oil price outlook.
Inflation and Western economies. As a rough rule of thumb, the energy sector tends to do best when it moves in a different direction. Higher prices lead to higher revenues and higher profits. This often increases investment in exploration and production. The demand for these stocks increases accordingly.
Inflation in the US is expected to increase significantly in June 2022. This may help explain why BP's share price is struggling. And that's despite the company beating market expectations for profit in its latest quarter.
Passive income powerhouse
Despite these headwinds, it can be said that BP is still worth picking up at this level for its cash flow.
The £68bn behemoth currently has a dividend yield of 5.7% which looks set to be covered twice by expected profits. This puts it at the top of the FTSE 100 in terms of payouts. The index itself yields 'just' 3.5%.
On the other hand, it is worth noting that BP has a checkered past. When the world economy is folded into six – like at the beginning of the Covid-19 pandemic – big cuts often follow.
This is not a reason for me to avoid investing. The fact that management chose to increase Q2 dividends per share by 10%, for example, is encouraging. I also like how BP is cutting costs. It now has much less debt than it did a few years ago.
But the volatility of dividend payments helps justify why I don't rely on just one stock for this purpose. A little diversification always makes sense, especially since many other FTSE 100 companies have increased their returns consistently.
My decision
The current BP issues seem temporary to me. Therefore, I think that buying shares now may be a tough move at the moment, although there is always a chance that the price may still fall further.
If generating passive income was important and I had cash burning a hole in my pocket, I would start building a position today.
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