BP is one of the cheapest stocks on the FTSE 100. Am I buying?

A bumper year of earnings for British oil giant BP (LSE: BP) has made the stock look astoundingly cheap. One measure, the price-to-earnings ratio, is now only 4.5 for the company. That looks like a bargain compared to the trailing 12 months P/E ratio of the FTSE 100 of around 14 and the 10-year Footsie average of 19. 

That means, compared to other UK-based firms, the company is generating a lot of profit for the 535p it would cost me to buy a share. Based on this, now could be a rare chance for me to buy into one of the cheapest stocks on the FTSE 100. 

A sideways stock

I see three reasons why this stock looks cheap that can help me work out if I should buy some shares. First, BP is what some call a ‘sideways stock’.

That’s a name given to a company whose share price doesn’t go up or down much over long periods. I think the term is suitable for the oil firm over the last couple of decades as the following graph shows. The reason this lack of growth is a problem is that if I held a stock like this then I’d have to rely on dividend payouts to get a return on my investment. 

As I mentioned, BP’s current dividend yield is 3.92% for the year. That’s not awful, but a lot of investors would say 4% is a mediocre return which could drive the share price down.

A banner year

Second, BP’s current P/E ratio uses earnings from the last 12 months. While the 2022 profits of GBP28bn are impressive, the profits from 2021 were only GBP13bn. 

The reason for the high 2022 figure is the recent boom in oil prices which surpassed £120 a barrel at their peak. I suspect this was a temporary boost, and the fact that the current price for a barrel is already down to below £80 makes me think I’m right.  As such, the stock only seems extremely cheap looking at the last 12 months.

And actually, the P/E ratio at the end of 2021 was at 11.8, which makes the stock seem less of a no-brainer buy.

The long term

Finally, another factor that makes BP look cheap is its future prospects. Oil and gas companies are similar to tobacco companies in that the products they sell have an uncertain future. The oil behemoth does have an interest in what it hopes are future-proof renewables, making a £356m investment in low-carbon projects in the first half of 2022. However, over the same period, it invested £4.5bn in oil and gas projects. 

Spending 12 times more on oil projects than renewables tells me where the focus for the firm is.

So even if the stock does look cheap, I’d be concerned about what the share price would do over the long term.

Taken together, I believe these three reasons explain why I won’t buy shares in the firm right now despite its cheap valuation.

Tags:

barker-and-stonehouse listed on couponmatrix.uknovatech listed on couponmatrix.ukorigins listed on couponmatrix.ukschool-stickers listed on couponmatrix.uksephora listed on couponmatrix.ukshuperb listed on couponmatrix.uk
barker-and-stonehouse listed on couponmatrix.ukBarker and Stonehouse pride themselves on their diverse selection of furniture sourced from every corner of the globe, from stylish sofas to elegant dining sets and beautiful beds. Whether you’re looking for the latest trend or a timeless classic, there’s something to suit every interior and the barker and stonehouse discount code means you can achieve top designer looks without having to save up for months or years. Brands include Ercol, Little Tree Furniture, Duresta and Timothy Oulton.
novatech listed on couponmatrix.ukFor high quality computers and tech at low cost prices, look no further than Novatech and get ready to invest in the best! Grab a Novatech discount code from us to take advantage of affordable yet reliable products and give your home office a boost without busting your budget. Offering everything from crystal-clear monitors and powerful servers to cutting-edge software and convenient tablets on tap, upgrade to Novatech and enjoy award-winning tech for less.
origins listed on couponmatrix.ukIf you want glowing soft skin at minimal cost to the environment, Origins is for you. The skincare brand take pride in its environmental efforts, from reforestation projects, to natural non-toxic-to-skin products. With the Origins discount code you can enjoy exceptional skin quality and conscience-free products for less. Immerse yourself in scientifically proven and naturally formulated skin treatments. Love yourself and love the environment with the Origins skincare brand.
school-stickers listed on couponmatrix.ukStocking everything from stickers to postcards, badges, trophies, and so much more, give your kids that bit of motivation they need to put in 110% at school with School Stickers. With customisable tools for parents and teachers of early years, primary school, and secondary school children, you’ll find everything you need and more to tell them “well done”. What’s more, with a School Stickers discount code, you can give a sense of pride for even less. After all, who doesn’t love an acknowledgement of a job well done?
sephora listed on couponmatrix.ukSephora is like the big sister of the beauty world, and it’s now Feel Unique’s brand-new home! Choose from thousands of the top brands in makeup, fragrance and skincare – instead of a Feel Unique discount code, you’ll want a Sephora promo code from Groupon instead. Sephora is stocked with world-leading brands like Huda Beauty, DIOR and Charlotte Tilbury, and there are now even more great offers to enjoy, including 10% off your favourite brands, free gifts and Sephora voucher codes.
shuperb listed on couponmatrix.ukYou can stride with pride whenever you shop with Shuperb, the family-led shoe store with generations of expertise. Whether you ‘re looking for wellies to tackle your favourite walks or some sandals to flash on the sand, use a Shuperb discount code and slide into your ideal footwear for a fraction of the price. With brands you know and love like UGG, Rocket Dog and Harley Davidson, there’s a style to match every strut at Shuperb.