BP: The Most Undervalued Major Oil High-Dividend Stock

Mar.30.12 | About: BP p.l.c. (BP)

Looking for undervalued high dividend stocks with strong financials, earnings growth at a reasonable price, and future dividend growth?

Surprisingly, British Petroleum (NYSE:BP), an Energy stock that many investors fled from after its Gulf oil spill fiasco, may be one of the best stocks to buy once again for these features.
Big Oil stocks have been out of favor with investors for the past 12 months, down a bit over -1%, but BP has actually begun to get some support from institutional buyers in the past few months - unlike 2 of its peers, Chevron (NYSE:CVX) and Exxon (NYSE:XOM). BP is also in the upper region of oversold territory, with its RSI of 35.14:

(Click to enlarge images)BP-CVX-XOM-PERFClick to enlarge

Much of this new-found support probably has a lot to do with BP's improving earnings and cheap valuations. Although BP is only projected to grow 6.36%, its very low P/E gives it an attractive PEG ratio.
BP reported strong EPS growth in its most recent fiscal year and recent quarter. Surprisingly, BP's sales growth over the past 5 years topped both Exxon and Chevron, and was just above industry averages:

BP-PEGClick to enlarge

Dividends: After the 2010 spill, BP eliminated its $.84 quarterly dividend payout for the balance of 2010, and then reinstated it at 50% less in 2011 ($.42/quarter).
BP was able to increase its quarterly dividends in 2012, for the first time since the spill, raising it over 14%, to $.48/share. BP stated earlier in 2012: "With operating cash flow generated by BP in 2011 reaching some $22bn - over 60% higher than in 2010 - CEO Bob Dudley confirmed the company's expectation that net cash flow in 2014, in a $100 oil price environment, would be around 50% higher than in 2011. Half of the additional cash is expected to be used for re-investment and half for other purposes including increased shareholder distributions.

2012 will be a year of increasing investment and milestones as we build on the foundations laid last year. As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream. (Source: BP website)

BP's dividend yield now compares favorably with CVX and Exxon and industry avgs:

BP-CVX-XOM-DIVSClick to enlarge

Covered Calls: Selling covered call options is an easy way to increase your income on dividend paying stocks. These Oct. 2012 calls pay nearly 3 times the amount of BP's 2 quarterly dividends during this 7-month period.
This $45 Oct. 2012 call option also holds a potential assigned yield of 2.66% annualized ($.65/share, the difference between the $45 strike price and BP's $44.35 share price). The catch is that your BP shares will be sold/assigned at or near expiration time, if BP rises above the $45 strike price.

(You can see additional details for this and over 30 other high options yields trades in our Covered Calls Table.)

BP-CALLSClick to enlarge

Cash Secured Puts: If you're leery of BP's gulf spill headline exposure, you could sell OCT. $44.00 cash secured put options, which is below BP's share price, and get paid $3.65/ share ($365 per option contract) now to wait.
This gives you a lower break-even price, of $40.35. This put option pays out 3.8 times what BP's dividends pay over the next 7 months. In addition, you'll receive your options premium money within 3 days of making the trade, often even the same day, so you'll have the use of this money now, instead of waiting for the quarterly dividends. (Note: Put sellers don't receive dividends.)

(You can see more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

BP-PUTSClick to enlarge

Financials: Although they're not as impressive as some of Chevron's and Exxon's figures, BP's financial metrics are above industry averages, with the exception of its operating margin. Even though its Debt/Equity ratio is higher than CVX and XOM, BP has a very high Interest Coverage figure of 31.8.


Disclosure: Author is long shares of BP and XOM, and is short BP put options.