BP share price plunge! Why I think oil and tobacco value stocks look a good buy

Kirsteen Mackay
·3-min read
Arrowings ascending on a chalkboard
Arrowings ascending on a chalkboard

The BP (LSE:BP) share price is enduring a dismal year and has plunged 47% since its brief June high. Nevertheless, I own this stock and see merit in holding for the long term. When choosing stocks to buy, I want to own companies I believe will be here for many years to come. BP, Royal Dutch Shell and British American Tobacco are some FTSE 100 oil and tobacco companies I expect to still be here in 10 years’ time.

As we’re living in unprecedented times in which the world order and economic landscape are changing, I do not profess to have a crystal ball. Anything could happen, and these companies may not survive to tell the tale. However, their longevity and past performance give me confidence.

Will oil stocks recover?

The oil industry may bounce back to a new normal, but some investors question whether oil stocks will ever recover to previous price points. It may set the decline in sentiment towards the industry, ensuring oil stocks remain risky buys. Pressure is mounting on hedge and pension funds to move money into socially responsible investing. Meanwhile, consumers increasingly feel ethically obliged to avoid oil stocks, particularly when there are so many alternatives to choose from. This attitude shift could well keep oil stock prices suppressed. I get this scenario, but I’m not convinced we’re there yet.

Is oil the new tobacco?

The tobacco industry and its stocks have previously witnessed a similar decline, but many of the top tobacco companies are still operating. Tobacco is a sin stock and investors feel guilty owning such assets. However, many funds still do, because the dividend returns are great and ultimately it helps them make money.

British American Tobacco’s share price has been in decline since 2017, prior to that it had been on a winning streak for 17 years. Today it’s closer to its 2004 price, but it remains the number one cigarette maker in the world, which means it’s unlikely to go bust. It has a price-to-earnings ratio (P/E) of 9.3 and dividend yield close to 8.3%. This makes it highly attractive as a buy-and-forget portfolio stock.

Diversification

Some tobacco companies have diversified into e-cigarettes, vaping products, and cannabinoid goods. In a similar vein, oil companies are investing in renewable energy to ensure their businesses are growing with the times. This shift into alternatives may give them a green card to stay within hedge fund and pension portfolios.

Silhouette of an oil rig
Silhouette of an oil rig

The BP share price is currently at its 1994 level, which is depressing for long-term holders, but I think it presents a buying opportunity. BP has a P/E of 12, earnings per share are 15p and its dividend yield is now approaching 11%. It reported adjusted net profit of $86m for Q3, which was an improvement on its Q2 loss. It also operates a sophisticated trading division that helps balance its books. This thrives on market volatility and could help it weather the bad times.

Meanwhile, Royal Dutch Shell’s share price has not been this low in 25 years. I think it’s another company with value stock status. The P/E is less than 6, earnings per share are £1.51 and its dividend yield is over 7%. Shell cut its dividend earlier this year, but has begun raising it again.

So, are these value stocks a good buy because their share prices are so cheap? I think so.

The post BP share price plunge! Why I think oil and tobacco value stocks look a good buy appeared first on The Motley Fool UK.

More reading

Kirsteen owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020