While oil giants like Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) have recently hit new 52-week highs, British oil giant BP plc (NYSE:BP) is still about 20% off its 52-week high. BP shares seem to be held back by a few challenges, but that is giving investors a chance to buy this leading oil company at bargain levels when compared to its American counterparts.
BP is still dealing with the aftermath of the oil spill in the Gulf of Mexico, however, the company has made significant progress and it is reportedly close to reaching a settlement with the United States Department of Justice. While other claims would still remain, a settlement with the United States could reduce a significant amount of uncertainty for the company and shareholders. Here are a few reasons why dividend investors should consider buying BP on pullbacks:
1. The dividend offered by BP is very generous, and it is one of the highest yielding oil stocks in the market. BP yields about 4.6%, and earlier this year, it raised the dividend. By contrast Chevron yields about 3.2% and Exxon Mobil yields around 2.5%. That's a huge difference, especially if you plan to hold these stocks for many years. Since analysts expect the company to earn about $5 per share annually for the next couple of years, the company has plenty of room for additional dividend increases in the coming years.
2. BP shares look undervalued when compared to the S&P 500 Index, which currently yields about 2% and trades for about 15 times earnings. BP trades for just around 8.7 times earnings and it yields more than double the average stock in that index.
3. BP has projects in oil-rich Brazil and India as well as other areas which should significantly increase production and reserves in the next few years. During the second quarter of 2012 the company announced it acquired 43 leases in the Gulf of Mexico, which are awaiting regulatory approvals. It also resumed operation of its exploration contracts in Libya. It is also moving forward with exploration in Angola, Namibia and Australia. The CEO of BP expects new projects to boost production in the coming quarters and he stated:
"Moving into 2013, we expect earnings momentum to build as we complete payments into the Trust Fund, as high-value production comes back on line, and as the impact of new projects ramps up,"
4. Analysts expect earnings to grow nearly 20% between now and 2013, and as new global projects come into production, additional growth is likely. While investors wait for the ongoing spill claims and stigma to be resolved, they are paid a generous yield that beats what many other investments offer. Negative headlines or a decline in oil prices could create short-term pullbacks in BP shares, and that would be an ideal time to buy for the long-term.
Key Data Points For BP plc From Yahoo Finance:
Current Share Price: $41.30
52-Week Range: $36.25 to $48.34
Dividend: $1.92 which yields 4.6%
2012 Earnings Estimate: $4.78 per share
2013 Earnings Estimate: $5.63 per share
P/E Ratio: about 8.7 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.