For long-term investors, BP PLC (NYSE: BP) is still very attractive.
Anyone concerned about BP’s ability to withstand its current legal woes and the plunging price of oil should consider a few features about BP PLC that are very telling.
For starters, the short float is just 0.39%. A short float of 5% is considered to be troubling for a publicly traded security. BP PLC has a short float that is smaller than that for ExxonMobil (NYSE: XOM), the world’s largest energy firm, at 0.92%; the 1.10% short float for Chevron (NYSE: CVX), another Big Oil firm; and equal to that for Royal Dutch Shell (NYSE: RDS-A), the second biggest oil and natural gas entity on the planet, at 0.39%. BP PLC is the second-largest oil and natural gas company in Europe, behind Royal Dutch Shell.
The dividend yield for BP PLC is also much higher than that for ExxonMobil or Royal Dutch Shell.
For BP PLC, the dividend component is important in gauging the long-term health of the company. The dividend payments of BP PLC are critical for the economic health of Great Britain. A significant portion of the pension income for England comes from BP PLC dividends. That means there is tremendous political interest in protecting the dividend payment of BP PLC. When all is well and the dividend amount for BP PLC is rising, no politician in Great Britain need be involved.
But that has obviously not been the case since the Deep Water Horizon Gulf of Mexico tragedy in April 2010.
This was certainly a driving force behind BP PLC being the topic in a meeting between the British Prime Minister and the American President back in July 2010, shortly after the spill. The current dividend yield for BP PLC is more than 6%.. That is much higher than the dividend yield for Chevron (about 4% ), ExxonMobil (around 3%), and Royal Dutch Shell (just under 4.5%). The dividend amount was cut for BP PLC at the nadir of its legal woes, and then restored.
As BP PLC has restructured by selling assets and taking other measures to protect its dividend, it is difficult to imagine it being reduced again.
No energy company in the industry is as strong as it was when oil was over $100 a barrel for the simple reason that the main asset values have been seriously eroded. Oil, natural gas, and coal have all plunged. This also does great damage to the alternative energy sector as these power sources are not economically viable when coal, oil, and natural gas become so much cheaper.
In this regard, the oil accident in the Gulf might have actually helped BP PLC.
The company was forced early to restructure to pay the legal costs. From this, it sold off assets that were at peak price as oil was high. That allowed for it to become more efficient before the collapse in oil and natural gas prices imposed that market force on others. CEO Bob Dudley stated recently that low oil prices could persist for up to three years. It is also difficult to imagine that any foreseeable legal risks for BP PLC were not factored into the stock price long, long ago, however.
BP stock is now trading around $39 a share.
The mean analyst target price over the next year of market action is $44.03. Last month, Deutsch Bank raised its recommendation of BP PLC from Hold to Buy, also designating it a “Top Pick.” A high dividend yield combined with a low short float and bullish outlook from the analyst community make BP PLC an alluring long-term holding.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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