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BP (LSE: BP) shares are a bit of a conundrum. Once a FTSE 100 portfolio no-brainer, they’ve been volatile for around 15 years. The first big blow came with the Deepwater Horizon oil spill in 2010, which hung over the business for a decade.
The BP share price has also been battered by weaker oil prices, apart from the occasional spike such as in 2022, when Russia invaded Ukraine. Climate policy is another challenge. Go green or stick with fossil fuels? BP toyed with the first, then flew back to the second. Investors cheered the return to oil and gas, but going big on fossil fuels has risks too, especially if renewables keep getting cheaper.
Former FTSE 100 darling
When Brent crude threatened to slip below $60 a barrel recently, the shares weakened again. It’s nudged back up to around $65 on talk that OPEC+ producers may cut supply to support the price. That floor isn’t guaranteed to hold as US inventories swell and China stockpiles crude for its reserves.
Goldman Sachs now expects a 2m barrels-per-day global surplus by 2026, and reckons Brent will average around $56 next year. BP can still break even at roughly $40, yet a prolonged drop near those levels would hit profits, cash flow and the share price. Even so, the shares have climbed 18% over the last year and roughly 82% over five years, with dividends on top. The journey has been bumpy though.
Dividends climbing back
BP was once renowned for its dividend. That reputation took a blow when the payout was cut by 36% in 2020 and 18% in 2021, as the pandemic crushed demand. It has started to recover though. Investors have seen three double-digit hikes in the last three years, lifting last year’s total dividend to 31.27 US cents per share.
Analysts reckon the yield could hit around 5.95% in 2025 and possibly 6.16% in 2026. That’s far higher than today’s FTSE 100 average of about 3.25%. An investor who used their full £20,000 ISA allowance on this one stock would generate roughly £1,232 in income over the next year.
BP also rewards investors through share buybacks, with plans to return 30% to 40% of total operating cash flow to investors through dividends and repurchases. That could offer some support to the share price and might help accelerate dividend growth by reducing the number of shares in circulation.
Stock prospects
If the downbeat Goldman Sachs prediction comes good, next year could be tricky. Renewed talk of a US recession won’t help. Yet brokers seem upbeat. The median forecast from 29 analysts suggests the shares could hit 503p within a year, around 9% above today’s level. Add the forecast yield and total returns could head towards 15%.
I hold BP myself and would happily take that today. Forecasts aren’t set in stone and the energy sector is cyclical. The shift to renewables and electric vehicles may keep chipping away at long-term demand for crude. Some investors may prefer to avoid BP on environmental grounds altogether. I think it’s still worth considering for both income and growth, but with a long-term view.
