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

A bumper year of earnings for the British oil giant BP (LSE: BP) has made the stock look astonishingly cheap.

One measure, the price-to-earnings ratio, is currently just 4.5 for the company. That looks like a bargain compared to the trailing 12 month P/E ratio of FTSE 100 around 14 and the average Footsie 10 is 19.

That means, compared to other companies in the UK, the company is generating a lot of profit for the 535p that I would buy shares.

Based on this, now could be a rare opportunity for me to buy one of the cheapest stocks in the FTSE 100.

Save the side

I see three reasons why this stock looks cheap that can help me if I need to buy some stocks.

First, BP is some of the so-called ’tilt stocks’. It is the name given to a company whose stock price does not rise or fall over a long period of time.

I think the term has been appropriate for oil companies for the past several decades as shown in the chart below.

The reason for this lack of growth is that if I hold a stock like this, I will have to rely on dividend payments to return my investment.

BP’s current dividend yield is 3.92% per annum. That’s not bad, but many investors will say 4% is a mediocre return that can drive down the stock price.

A banner year

Second, BP’s current P/E ratio uses earnings from the last 12 months. While the 2022 profit of £28bn is impressive, the profit from 2021 is only £13bn.

The reason for the high 2022 figure is the increase in oil prices that exceeded $120 per barrel at their peak.

I suspect this is a temporary boost, and the fact that the current price for a barrel has dropped below $80 makes me think I’m right.

As such, the stock has looked very cheap over the past 12 months. And in fact, the P/E ratio at the end of 2021 is at 11.8, which makes the stock look like an underbuy.

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 has taken an interest in what it sees as the renewable energy future, investing $356m in low-carbon projects in the first half of 2022. However, at the same time, it invested $4.5bn in oil and gas projects. .

Spending 12 times more on oil projects than renewables speaks to the company’s focus. So even if the stock looks cheap, I would worry about what the stock price will do over the long term.

Taken together, I believe these three reasons explain why I would not buy shares in the company today even if the price is low.