BP Plc (BP), the integrated energy (oil and gas) company, has an attractive 5.68% dividend yield and a low 10x price/earnings (P/E) multiple. These are attractive value metrics for value investors, including short-sellers of out-of-the-money (OTM) put options.
BP ADRs (American Depository Receipts) are at $33.74 in midday trading on Monday, March 31, well off their recent high of $35.31 on Feb. 18. BP could be worth more using its historical dividend yield metrics, as well as from analysts' price targets.
Moreover, investors can set a lower buy-in target price using a short-put play in OTM strike prices for nearby expiry periods. This article will delve into this opportunity with BP stock.
Dividend Yield Play
BP pays a quarterly dividend per share (DPS) of 48 cents ($1.92) annually. That gives the ADRs a dividend yield of 5.69% (i.e., $1.92 / 33.74 = 0.0569).
That is well over its historical 5-year average yield of 5.12%, using Morningstar's data, and 4.69% using Seeking Alpha's 4-year average yield data.
That implies that BP stock could still be worth more, if it were to trade at these average yields. For example, at a 5.12% average yield, BP stock would trade +11% more at $37.50:
$1.92 DPS / 0.0512 = $37.50 target price
$37.50 / $33.74 = 1.1114 = +11.14% upside
BP has raised its dividend per share annually for the past 3 years, and the market believes this will continue. Given that it has already paid out 3 of 4 quarterly payments at $0.48, in July investors might expect to see another DPS raise.
So, if we assume that the DPS rises by 4 cents per share quarterly (as it has done in the past 2 years), the annual DPS could be $2.08. But, just to be conservative, let's assume it only rises to $2.00. Here is what the stock could be worth at its average yield:
$2.00 / 0.0512 = $39.06 target price;
$39.0 / $33.74 = 1.1575 = +15.8% upside
In other words, sometime in the next 6 months, BP ADRs could be worth over 15% more, using its average historical dividend yield as a valuation tool.
Analysts' Target Prices
Moreover, based on analysts' estimates, the stock does not appear to be too highly priced. For example, Seeking Alpha shows that its forward P/E multiples are 10.4x and 9.6x for this year and next.
Analysts also see higher price targets for BP ADRs. For example, Yahoo! Finance reports that its survey of 17 analysts has an average price target of $37.86 per share, providing a +12.2% upside.
Similarly, Barchart's survey has a $39.33 target price average. That is close to the $39.06 target price using its expected dividend hike in July.
However, there is no indication of when this target price will happen. One way to conservatively play this is to set a lower buy-in target price by shorting out-of-the-money (OTM) put options. That way an investor can get paid while waiting to buy at a lower price.
Shorting OTM Puts
For example, look at the May 2, 2025, expiration period, which is just over one month away (i.e., 32 days to expiry - DTE). It shows that the $32.00 strike price put option contract (5% below today's price) has a midpoint premium of 40 cents.
That provides a short-seller of these put contracts an immediate yield of 1.25% (i.e., $0.40/$32.00). Moreover, for more risk-averse investors, the $31.00 strike price has a premium of 22 cents, or a 0.71% yield.
As a result, an investment using a mixture of these two put strike prices could give an investor an approximate 1.0% yield over the next month. That implies an annual expected return (ER) of 12% annually, assuming an investor could repeat this trade every month for a year.
The point is that this is a relatively cheap way to set a lower buy-in point for value investors. For example, if an investor repeats this trade for 3 months at the $31.00 strike price, the average breakeven point, even if the stock falls to $31.00, would be:
$31.00 - ($0.22 x 3) = $31-$0.66 = $30.34 breakeven
That point is over 10% below today's price. Moreover, an investor who buys in at this price would receive $2.00 (see above) in expected annual dividends. That means their dividend yield would be:
$2.00 / $30.34 = 6.59%
Downside Risks
Nevertheless, there are risks associated with this play. One risk is opportunity cost. For example, if BP stock never falls to the cash-secured short-put strike price, the investor is left with just earning the expected return on a repeatable basis. That may be less than the total return from buying BP shares with any upside, plus the high 5.69% dividend yield.
Moreover, another risk is a potential unrealized capital loss. For example, if BP stock falls below the strike price and the breakeven level, the investor is left owning shares at a potential loss.
However, even in that case, the investor has good alternatives. Note that in that case, the investor could hold on to the shares, assuming that it is tethered to value metrics and will eventually rise.
In addition, they can sell covered calls on these shares at higher out-of-the-money (OTM) call option strike prices. They can also sell more puts at lower OTM puts.
These might allow the investor to recoup some of any potential unrealized loss. Another way to hedge any potential loss is to buy puts at the same time in lower strike prices than the short-put strike price put option levels.
Investors can study these risks and other ways to hedge by going to the Barchart Options Education “Learn” section and the Options Trading Risk tab.
The bottom line is that BP ADRs look cheap based on the average yield, analyst target prices, and short-put plays.
