There are plenty of risks with this stock, but the rewards make it worthwhile

The company’s solid fundamentals mean it offers good value for money Robert Stephens

Related Topics

• British Petroleum
• Gas
• Share tips

19 September 2025 5:00am BST

From next week, Questor will be returning to its 60-year-old roots as a weekly column examining markets and offering an inside scoop on the City. Find this column every Monday, in print and online.

There is no such thing as a perfect income stock. While some companies offer a reliable income, often because of their defensive characteristics, their potential to deliver a rapidly rising dividend can be limited due to the slow-growing nature of their industry. Their yields may also be somewhat unappealing due to the relative safety of their payouts.

By contrast, companies that offer the potential for fast-paced dividend growth due, in many cases, to the prospect of a booming economy are typically risky given the inherent existence of cyclicity. Investors, of course, can be richly rewarded for taking such risks via a relatively high yield.

As a result of this perennial trade-off between risk and reward, it is imperative for income investors to build a diverse portfolio of dividend stocks. Otherwise, their holdings may fail to strike a balance between dependability and growth.

Energy company BP occupies the riskier end of the income spectrum as a result of its fundamental reliance on oil and gas prices. This equates to relatively volatile profits that can come under severe pressure during bouts of economic uncertainty.

Indeed, the company’s latest half-year results showed that profits declined by 32pc versus the same period of the previous year. This was largely caused by lower refining margins and a lower gas marketing and trading result. It means that BP’s dividend cover fell from 2.2 in the first half of the previous year to 1.5 in the same period of the current year.

While this still represents a healthy level, in terms of shareholder payouts affordability, given the current level of profitability, an uncertain near-term economic outlook amid a global trade war may mean that dividend growth, which amounted to 6.9pc in the first half of the current year, proves to be somewhat more limited in future.

However, in Questor’s view, BP’s annualised yield of 5.8pc sufficiently compensates investors for its volatile financial performance and the potential for a slower pace of dividend growth in the short term. Its income return is 250 basis points higher than that of the FTSE 100, with its plans to further review costs after cutting them by $1.7bn (£1.2bn) since 2023 likely to provide a degree of support to its financial prospects.

So, too, could the company’s renewed focus on maximising shareholder value by growing its oil and gas business, and being far more selective when investing in renewables. With further interest rate cuts in the US likely to bolster the world economy’s performance over the long run, the company’s financial performance could significantly improve.

In the meantime, the BP’s solid financial position means it is well placed to overcome an uncertain economic period over the coming months. Its net gearing ratio, for example, amounts to a rather modest 33pc, with the company aiming to reduce net debt over the medium term.

With a price-to-earnings ratio of 10.6, the company’s shares appear to offer a wide margin of safety that suggests there is scope for an upward rerating. Its share price, moreover, is likely to be supported by a buyback programme amounting to $750m (£534m) that is due to be executed before the company’s third-quarter results are released in November.

Since Questor recommended BP as a “buy” during August 2021, its shares have risen by 43pc and outperformed the FTSE 100 by 20 percentage points.

Following their addition to our income portfolio in May last year, however, they have produced a 13pc capital loss. Even when dividends received amounting to 6pc of our notional purchase price are factored in, our total return stands at a thoroughly disappointing -7pc loss.

This column, of course, is unperturbed by temporary paper losses. In fact, as a result of BP’s high yield, solid fundamentals and upbeat long-term outlook, we will use part of our existing cash balance to add to the notional position in our income portfolio.

Certainly, there are less risky income stocks available elsewhere in the FTSE 100, but given its reward prospects are highly enticing, the risk/reward opportunity remains favourable when held as part of a diverse portfolio of dividend shares.

Questor says: buy
Ticker: BP
Share price at close: 425.6p

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