When investing, I focus primarily on long-term holdings, looking for good-value companies with solid fundamentals. I now actively aim to find new stocks to include in my ISA as a core part of my investment philosophy. This is because a Stocks and Shares ISA allows all investments within the account to grow free from capital gains and income tax. I consider this a great vehicle for both medium and long-term investing due to those benefits.
My ISA strategy
Due to the longer duration of ISA-focused investments, I like to look for companies that pay a good dividend yield. I want companies that have paid an above average dividend consistently for several years and have grown it annually. The aim of this approach is that the beauty of compounding can happen within the ISA, allowing me to hopefully build a larger return after a few years. The dividend doesn’t need to be huge but should be a fair yield with a consistent payment history.
The first stock on my ISA list for next year is BP (LSE: BP). It’s one of the world’s largest oil and gas producers, with significant oil exploration and refinery operations. After a tough few years, it appears to have had a complete reversal and has gained rapidly. The share price rose almost 30% in 2021 and has increased by a staggering 51.3% this year. In addition, the company also has strong underlying fundamentals, with reasonable profit margins and solid cash generation efficiency.
Impressive dividend and forecasts
The main reason for my interest in the company is the current dividend yield of 3.2%, which has been paid consistently for the last 30 years. This dividend is also forecast to grow by 28.5%, reaching 4.1% in 2023. The forecast dividend cover is 6.2, indicating that even after this increase, it can be comfortably paid from earnings per share (EPS). This is very promising as an ISA-focused investment, as consistent and growing dividends are a core part of my strategy.
Analyst expectations for 2023 are also very encouraging, with growth expectations above the three-year average. The company’s turnover is forecast to increase by 49.1% in 2023 and EPS by 127%. These extremely high predicted growth rates help explain why the yield is forecast to grow so much and how it can still be covered comfortably by earnings.
The full picture
Despite these growth rates being very impressive it’s important to recognise that they’re based on 2021 full-year performance. The firm’s 2021 results significantly improved from the operating loss incurred in 2020, but were still below pre-pandemic levels. For this reason, even after the forecast growth, turnover is expected to be below that of 2018.
Additionally, BP’s debt load is big at almost 67% of its current market capitalisation. Given that the company is benefiting from the recent increases in global oil prices and other commodities. A price fall could result in performance dropping back.
Nonetheless, its dividend and growth expectations are very appealing to me. I believe that the company still represents a great long-term investment opportunity. Therefore I’ll be keen to add the company to my Stocks and Shares ISA next year once I have some cash to spare.
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Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022