The tax-free nature of an ISA means that itsperfect for stocks that pay a hefty dividend.
BPs(LSE: BP)dividend yield is one of the best around. The companys shares currently yield 5.9%, but is BP a suitable pick for your ISA?
Unlike many of the FTSE 100s blue-chip companies, BP is riskier than average. Indeed, the companys exposure to Russia, as well as its Gulf of Mexico liabilities, means that BP comes with a high-risk warning.
If the situation between Russia and the West deteriorates further, its possible that BPs near 20% share of Russian oil giantRosneft could be seized by the state, which would cost BP billions.
BP is also facing the prospect of additional fines stemming from its role in the Gulf of Mexico disaster.
Still, its not all doom and gloom. BP is one of the worlds largest oil companies andthe groups underlying business ranks as one of the best in its peer group.
You see, for the next two years, BP is only planning to spend $20bn per annum of capital projects, which, according to City analysts, indicates that the company will be free cash flow positive by 2016, after the payment of dividends to investors.
This fact may not seem overly impressive at first glance, but it puts BP in an elite group. Many of the companys peers are struggling to achieve this key goal of generating a positive free cash flow.
Additionally, BP has over50 deepwater oil projects under development. These projects could produce an additional 900,000 barrels per day of oil equivalent production by the end of the decade, a fact that underlines BPs growth potential.
Having said all of the above, BPs current depressed valuation could be too hard for some opportunistic value investors to pass up. Specifically, on a per barrel of reserves basis, the company is the cheapest in the big oil sector.
However, due to the fact that BPs earnings are set to collapse this year, tracking the falling price of oil, the company is currently trading at a forward P/E of 19.1, which looks expensive. But while the price of oil remains volatile, it makes sense to value BP according to its reserves, not earnings.
The bottom line
So overall, BP is primed for growth, undervalued and offers a hefty dividend yield of 5.9% but there are still plenty of risks facing the company. Further, BPs future is linked to the price of oil. If oil rebounds, BP will surge ahead, but if the price of oil remains depressed, then the companys performance will remain subdued.
With that in mind, BP may not the best pick for your ISA. The company is only suitable for those with a high risk tolerance.
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