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Questor: hold BP, despite the risks to the dividend posed by volatile oil prices
This week, Questor takes a break from publishing fresh share tips to revisit three widely held stocks recently covered here. We look first at BP, which published first-quarter results yesterday.
The numbers were slightly better than expected and the company reiterated its growth targets, saying its seven key “upstream” (production) projects were all on track.
But, as we pointed out in February, when the group published full-year results, BP requires the crude oil price to be at least $60 a barrel to break even. As the price is currently about $50, investors who hold the shares for the generous dividend – the yield is currently 6.8pc – are justified in feeling nervous.
The dividend will be truly sustainable only if the company’s cashflow routinely exceeds its costs. Neil Woodford, Britain’s most prominent income investor, warned in March that BP and Shell were maintaining their dividends only by borrowing and selling assets and were in effect “liquidating themselves” in order to sustain the payments to shareholders.
It’s true BP expects its break-even price to fall steadily to $35-$40 by 2021. But to some extent, buying the shares seems to be a bet that the oil price remains at least at its current levels and that BP doesn’t end up chasing an ever-receding target.
In February, we rated the shares a hold, reassured by fund managers such as Ben Lofthouse of Henderson who remained happy to hold the shares.
He pointed out at the time that the yield reflected the market’s belief that the dividend would be cut – and that if the fears turned out to be unwarranted the share price would eventually recover in order to reduce the yield to a more normal level.
Henderson said yesterday that there appeared to be nothing in the latest update to warrant a change in its stance. Likewise Questor, while acknowledging the risks posed by the volatile oil price, maintains its “hold”.
Questor says: hold
Ticker: BP.
Share price at close: 449.6p
Update: Kromek
In March we tipped Kromek, the maker of hi-tech sensors including “dirty bomb” detectors, as a buy at 27p, impressed by the enthusiasm for the stock of Gervais Williams, a fund manager at Miton.
He pointed out that the company was on the brink of breaking even and that any increase in sales would feed straight through to the bottom line, as research and development accounted for most of its costs.
In a trading statement last week Kromek said it expected “a step change in revenue growth” this year and confirmed that its “products continue to gain traction in all business segments”.
The shares have risen by 10pc since our tip, which followed several months of falls. Mr Williams said: “Although the share price has recovered to a degree, we are happy to retain our clients’ holdings.”
Questor says: buy
Ticker: KMK
Share price at close: 29.75p
Update: Motorpoint
Shares in Motorpoint have also performed well for readers who followed our tip in October last year – they have risen by 15.4pc from 141.5p to close at 163.25p last night.
We tipped the shares because of significant buying at 138p by the firm’s senior executives after a sharp fall in the price as the result of a profit warning. The warning was blamed on precautionary measures that the company took to avoid being left with excess stock after the EU referendum.
At the time of the tip, Questor was also reassured by the fact that investors including Mr Williams held shares in the company.
Motorpoint issued a trading statement last month, of which Mr Williams said: “Although the company had a slightly disappointing period of trading after the referendum, it confirmed that trading had picked up more recently.”
He said analysts’ forecasts following the trading update would leave the shares trading on 13.1 times earnings for the current year, falling to 10.4 the following year. Mr Williams added: “The cash payback on Motorpoint’s new sites is expected to drive good growth in the free cashflow yield over the next two years.”
Questor says: buy
Ticker: MOTR
Share price at close: 163.25p