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IAG (LSE: IAG) shares have been on a tear lately. I’m happy because I hold them in my Self-Invested Personal Pension alongside BP (LSE: BP), which has also been doing well.
Both are relatively recent buys and have delivered decent gains, jumping 20% in the last three months. But their longer-term stories could hardly be more different. Over the past year, International Consolidated Airlines Group, to use its full name, is up 115%, while BP grew just 0.38%.
The two companies respond very differently to oil price movements. When Brent crude is strong, BP benefits as revenues rise. Airlines feel the pinch instead, with higher fuel costs eroding margins. When crude slipped to around $62 in May, BP was in the doldrums while IAG soared. Since then, oil has drifted back towards $70, lending BP some support.
FTSE 100 recovery stocks
The contrast shows up in valuations too. Despite its surge, IAG still trades on a lowly price-to-earnings ratio of just 8.7. Investors shouldn’t assume the stock will inexorably rise until it falls into line with the supposedly fair value P/E of 15. Airlines are very exposed to shocks from natural disasters, terrorism, and economic downturns. Some kind of discount may persist.
BP’s P/E has ballooned to a staggering 245. The culprit is last year’s 97% collapse in earnings per share, which tumbled from 88 US cents in 2023 to just 2 cents in 2024. Profits tumbled from $23.75bn to $6.78bn over the same period. It’s still making money, just nowhere near as much.
Dividend yields in focus
Income investors will note the difference in payouts. BP still yields 5.1% on a trailing basis, with forecasts pointing to a 5.5% yield this year. Dividends are covered 1.4 times by earnings, so look sustainable if oil holds steady. The board has scaled back quarterly share buybacks though, down from $1.75bn in 2023 to $750m in the first two quarters of this year.
IAG can’t compete on income but it is restoring its dividend after cancelling it during the pandemic. Forecasts suggest a 2.5% yield this year, edging up to 2.63% in 2026. With luck, it should continue to climb but time will tell.
BP’s CEO Murray Auchincloss is shifting the company back towards fossil fuels. It’s also been boosted by some major new discoveries, cheering investors. However, this also leaves it vulnerable if renewables make the long-awaited breakthrough.
Growth forecasts
Analysts are cautiously positive on both stocks. For IAG, the consensus one-year price target stands at 431p, implying an 11.4% gain from today’s 387p. For BP, forecasts point to a rise from 435p to 466p, a modest 7.1% improvement. Add in dividends and the total returns climb to 13.9% for IAG and 12.6% for BP. That would turn a £10,000 investment into £11,390 and £11,260, respectively. Pretty respectable, but not magnificent.
Long-term investors might consider buying both, but they should accept the risks that come with them. Airlines will always be volatile, and oil producers remain at the mercy of commodity cycles. It’s worth checking out other FTSE 100 opportunities first, as investors may find more excitement elsewhere.
