I'd sell BP plc to buy this FTSE 100 dividend star

While the wider investment community has gone giddy over oil majors such as BP(LSE: BP) in recent weeks, I'm afraid I'm not buying into the hype.

The likes of BP have surged on the back of a bubbly oil price. In London, the Brent Index has smashed through the $60 per barrel marker on the back of a fresh supply freeze by OPEC and Russia, scheduled to last until the end of 2018. And, more recently, production outages and consistent inventory draws in the US has pushed the black gold price towards the $65 marker.

Of course higher energy prices are to be celebrated, but I remain concerned over the long-term supply/demand picture and feel recent buying activity over at BP (its market value has swelled 15% over the past few months) is looking a little frenzied.

Stateside supply flows

In particular I remain concerned by the scale at which US shale rigs are getting back to work, the steady build in hardware numbers keeping the country's output stomping higher.

According to latest Energy Information Administration data, Stateside producers dragged 9.789m barrels of crude out of the ground each day in the week to December 15, another fresh multi-decade high. And the body had previously said that it expects US output to smash through the 10m barrel milestone in 2018.

Middle Eastern drilling activity is clearly no longer the only game in town, particularly with other major producing countries -- Canada, Brazil and also the US -- investing huge sums in their own fossil fuel production capabilities.

At the moment, City analysts are expecting earnings at BP to balloon from 0.61 US cents per share in 2016 to 30.1 cents in the outgoing year, and again to 40.5 in 2018. And these predictions are expected to support further dividends of 40 US cents per share through to the close of next year, resulting in monster 5.8% yields.

But I am afraid my concern over the long-term supply balance outweighs the attractiveness of these vast dividend yields. In fact, I don't believe BP's uncertain earnings outlook is reflected by its toppy forward P/E ratio of 23 times, and therefore reckon buying the FTSE 100 giant is one gamble too far.

Paper powerhouse

Indeed, if I held shares in BP I would be happy to sell the oil leviathan to sink my investment cash into Smurfit Kappa Group (LSE: SKG).

Growth hunters may be unimpressed with the 1% earnings rise forecast for 2017, but the bottom line is predicted to rev higher from next year, with profits expected to leap 20% in 2018. The Footsie business is now starting to pass on its increased material costs onto its customers. And looking beyond the more immediate term, the structural undersupply in the packaging market looks likely to keep earnings on an upward tilt.

Moreover, I think Smurfit Kappa's progressive dividend policy is also worth checking out. Last year's payout of 79.6 US cents is expected to step up to 82 cents this year, resulting in a chunky 3% yield. And this will move to 3.2% in 2018, thanks to a predicted 88.2-cent reward.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. 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.

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