The BP share price has been one of the best-performing stocks to own in the FTSE 100 over the past 12 months.

Indeed, since the end of September 2017, the stock has added around 21% excluding dividends. If you include distributions to investors, the stock has returned 27.9% over the past 12 months.

The question is, after this staggering performance, can BP continue to produce double-digit returns for investors or, is it time to sell up and take profits?

Buy or sell?

The answer to the above question isn’t that easy. A large part of the company’s performance over the past 12 months is a result of the rising price of oil.

Since September 2017, the price of Brent crude has rallied from around $50 per barrel to just under $80 at present. For BP, which has been trying to get its average cost of production down below $50 per barrel, this price move means that for every barrel of oil produced, BP is now booking an extra $30 in profit compared to this time last year.

Considering the above, it is no surprise that the company reported a four-fold increase in profits for the second quarter of 2018. Underlying replacement cost profits hit $2.8bn in the three months to June 30, from $684m in the same period last year. Operating cash flow, excluding payments related to the Gulf of Mexico spill, hit $7bn.

With profits and cash flow booming, BP has decided to return more cash to investors. Alongside its half-year results, the company increased its dividend for the first time in four years and revealed a $6bn share buyback.

For the full year, City analysts believe the company can book earnings per share growth of 56%. A full year of oil prices at $80 next year could justify a further rise of 13% according to the City. Based on these numbers the stock is trading at a forward P/E of 13 falling to 11.5 in 2019.

Fair value

In my mind, this price is about right, and unless there’s a significant further increase in earnings per share it doesn’t look to me as if BP is going to move much higher — the stock seems to be trading around fair value based on the next two years’ earnings estimates.

However, I do see potential in the company as a dividend investment. The current dividend yield stands at 5.5%, and now profits are growing again, I believe the payout could steadily increase over the next few years, rewarding shareholders. There could also be additional share buybacks which will add to the total shareholder return by reducing the number of shares in issue, pushing up earnings per share.

So overall, I believe if you are looking for a growth investment BP might not be the best buy although, from an income perspective, I think the stock is highly attractive.

Disclosure: The author owns no share mentioned.

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