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BP (LSE: BP) shares are down 29% from their 18 October 2023 12-month high of £5.62. This leaves them looking insignificant in several important ways of stock valuation.
Factor in the forecasts for higher yields from an already high base and the stock looks even more compelling to me.
Share below par
On the key price-to-earnings ratio of the relative stock ratio, BP is currently trading at 11.5. This is the joint floor (and the A shell) of its competitor, with a P/E ratio of 14.2.
In the price-to-book ratio, it is second from the bottom (ahead of Shell) with a ratio of 1.3, with its peer group averaging 2.3.
It also has a lower price-to-sale ratio of 0.4 compared to a competitor's 1.8 ratio.
All this adds up to a stock that looks very profitable at its current price of £4.01, in my view.
Current yield
The stock's yield is rising as the price falls and BP shares are now back up 5.6%. This is based on a 2023 total share price of 28 cents (adjusted equivalent to 22.5p).
So, £10,000 invested in BP shares will produce £560 in dividends in the first year. Over 10 years the average yield can rise to £5,600 and over 30 years to £16,800.
Using dividends to buy more BP shares – 'dividend compounding' – could increase payouts significantly.
Doing this with an average yield of 5.6% would make an extra £7,484 instead of £5,600 after 10 years. And after 30 years, that would be another £43,446 in dividend payments, not £16,800!
A total investment in BP will then pay £2,993 a year in dividends, or £249 every month.
Forecast yields
That said, consensus analyst predictions are that these dividend payments will increase in the coming years.
By the end of this year, the forecast is 23.3p. In 2025, this rises to 24.9p, and in 2026 this rises again, to 26.1p.
At the current share price, this would give yields respectively over those years of 5.8%, 6.2%, and 6.5%.
In contrast, the current average yield of FTSE 100 3.5%, too FTSE 250 3.3%.
Income growth
A company's share price and profits are driven by the growth of its profits over time.
Much of this BP is expected to be a result of more efficient energy conversion than has been the case in the past. This includes exploiting large new oil and gas opportunities.
The latest such development was the September 23 visit of BP's board of directors to India to expand its business there. It already has a partnership with an Indian conglomerate Reliance Industries in the oil and gas and clean energy sectors.
Data from the International Energy Agency predicts that India will account for the largest share of global energy demand growth – 25% – over the next two decades.
Given this, the main risk in my opinion for the growth of BP would be a change in the strong strategy of changing energy.
However, as it stands, analysts project that it will see earnings increase by 10.6% each year until the end of 2026.
With its growth prospects, and the increase in share price and profits that may result, I will be adding to my existing holdings of BP shares in the near future.
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