BP Might Be The Best Dividend Stock To Buy Now: High-Yield Plus Capital Gains Potential

May. 1.12 | About: BP p.l.c. (BP)

The hunt for stocks that pay strong dividends is likely to continue for years to come since rates are low and the economic "recovery" remains weak at best. According to the U.S. Federal Reserve, interest rates will stay low for at least the next couple of years, and even if rates rise, it might not be by much. I am looking for stocks that not only pay an above-average yield, but also offer the potential for capital appreciation. After a recent pullback, the shares of BP PLC. (NYSE:BP) could be the perfect stock to meet these goals. While the stock might still seem controversial for some investors due to the oil spill in the Gulf of Mexico, the company has made tremendous progress in restoring the affected area, as well as its finances. Here are a few reasons why investors should consider buying BP shares for both dividend income and the potential for appreciation.

BP recently announced earnings that some investors found disappointing, and the stock initially sold-off. The company said earnings dropped about 13.6% in the first quarter of 2012, and this resulted in a profit of $1.52 per American Depository Share. This was below the $1.76 per share earned in the same period last year. These results were partially due to weak refining margins and lower production due to asset sales. Going forward, the next quarter or two is expected to see higher refining margins but soft production volumes due to seasonal issues in places like the Gulf of Mexico. That could mean the stock will also remain soft over the next couple of months, so investors should consider buying on dips to position their portfolios for a long-term rebound.

Here are a few reasons why investors should consider buying BP shares for both dividend income and the potential for appreciation:

1. BP is still facing claims and expenses related to the oil spill, however, the total exposure the company is facing is becoming more clear, and it appears to be manageable. In time, both the financial implications and the stigma that comes with a major oil spill will fade away. Investors who buy now and hold for the next couple of years are likely to benefit from this continued progress and passage of time.

2. BP shares were trading around $40 in December, and recently rose to about $48, however, the stock has pulled back for a number of reasons including renewed concerns about legal claims, falling oil
prices, and weak stock markets in Europe. Just days ago, economic data was released that indicated the United Kingdom fell into a double-dip recession. BP could feel some impact from a weak economy in the U.K. and Europe, but it should be minimal since oil remains relatively strong. Overall, the recent drop in the share price for these reasons appears to be a buying opportunity because they are all shorter-term issues that are likely to be resolved over time.

3. Even though the dividend payment is not as high as it was before the oil spill, BP is still one of the highest-yielding oil stocks. It now yields about 4.5%, and the company has even started to raise the dividend in recent months. With earnings power of about $7 per share, there is plenty of potential for the dividend to be increased even more in the future.

4. The average stock in the S&P 500 Index is trading for about 13 times earnings. Many major oil stocks are trading for about 8 times earnings, however, BP trades for around 6 times earnings. This indicates that BP shares are probably undervalued and that is one reason why investors who buy now could be looking at strong gains from stock appreciation.

5. BP has increased safety precautions so that oil spills do not happen, and so that if they do happen, they will be rapidly contained. The company has high-potential exploration projects in Brazil, India and other areas. Plus, it plans for several new projects between now and 2015 which could increase production and profits. The combination of an increased focus on safety and new drilling bodes well for the future of this company and it's shareholders.

When you consider the dividend and valuation of BP, it's easy to see why the shares could have upside potential. Compare the valuations of some other leading oil companies below, and the upside potential becomes even more clear.

Here are some key points for BP:

  • Current share price: $42.30
  • The 52 week range is $33.62 to $48.34
  • Earnings estimates for 2012: $6.77 per share
  • Earnings estimates for 2013: $6.94 per share
  • Annual dividend: $1.92 per share which yields 4.4%

ConocoPhillips (NYSE:COP) shares offer a solid dividend and trade at a reasonable price to earnings ratio of about 8.5 times earnings. However, BP offers a higher yield and it trades for a lower price to earnings ratio.

Here are some key points for COP:

  • Current share price: $72.01
  • The 52 week range is $58.65 to $80.13
  • Earnings estimates for 2012: $8.45 per share
  • Earnings estimates for 2013: $8.78 per share
  • Annual dividend: $2.64 per share which yields 3.7%

Chevron Corporation (NYSE:CVX) could be the best value in terms of U.S. based oil companies because it offers an above-average dividend yield, and a low price to earnings multiple, at about 8 times earnings. Still, BP shares trade for a lower price to earnings ratio and it pays a higher yield. Also of note, is the fact that Chevron is facing lawsuits in Brazil over an offshore oil spill in that country. The lawsuits are reported to be for about $22 billion, and that could put pressure on the stock.

Here are some key points for CVX:

  • Current share price: $106.18
  • The 52 week range is $86.68 to $112.28
  • Earnings estimates for 2012: $13.44 per share
  • Earnings estimates for 2013: $13.64 per share
  • Annual dividend: $3.60 per share which yields 3.4%

Total SA (NYSE:TOT) shares also offer plenty of value with a yield that is similar to BP's and a price to earnings ratio that is about 7 times earnings. This company is based in France, and the stock could remain under pressure due to the economy and debt crisis in Europe. It could also be under pressure due to an oil spill at the Elgin project located in the North Sea.

Here are some key points for TOT:

  • Current share price: $48.38
  • The 52 week range is $40 to $64.28
  • Earnings estimates for 2012: $7.31 per share
  • Earnings estimates for 2013: $7.59 per share
  • Annual dividend: about $2.61 per share which yields about 5.4%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.