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I Told You BP Plc Would Come Good!

BP investors strike black gold

Long-suffering investors in BP (LSE: BP.) (NYSE: BP.US) are still reeling from Wednesday’s unaccustomed good news, as its positive Q3 results lifted the share price 5.5% in a day, and another 1.5% on Thursday. As a BP investor myself, I’m stunned and delighted.

It’s been a testing five years, with the share price still down nearly 4% in that time, against a 50% rise in the FTSE 100 index. That is serious underperformance, and we all know why it happened. But I kept the faith, and I hope you did too, because I always believed BP would come good.

Last October, I wrote: “The road to recovery could be a lengthy one. But if you plan to hold for the long term, now could be a good time to roll out the barrel for BP.” It is up 12% since then.

In June, I said: “On a 5% yield and six times earnings, BP is too tempting to resist”. It is up 8% since then.

Yes, I know, these aren’t market-busting results. And I am certainly not claiming to be a stock tipping genius. I was simply abiding by a very Foolish philosophy, and slowly, steadily, this philosophy is proving its worth once again. 

Fools rush in

At Motley Fool, we like buying great companies on bad news. The aim then is to sit back, let the dividends roll in and give the share price time to recover.

BP is certainly a great British company, whatever its flaws, and news from the Gulf of Mexico was very, very bad. It looked like the perfect opportunity. I had a few wobbles along the way, as the US thirst for vengeance threatened to BP’s very survival, but I always felt it was too important to the British economy (and our pension funds), to be allowed to fail.

Thankfully, it looks like I was right, and BP is on the mend. Q3 replacement cost profits of $3,178 million were actually down on last year’s $4,534 million, but markets found plenty to celebrate in a 5.6% rise in the quarterly dividend to 9.5 cents a share, as BP shared the proceeds of efficiency savings.

It also pumped out $6.3 billion cash flow from operating activities, a figure that some forecasters expect to top $30 billion in 2015. Management is preparing to sell off a further $10 billion of assets and return the cash to investors, on top of $3.8 billion of share buybacks so far this year.

Feel that yield

I’m not saying the glory days are back. There are umpteen legal problems to resolve in the US, each with a multi-billion dollar price tag. BP’s 20% stake in Russian state-controlled Rosneft is hardly risk-free. FTSE 100 companies aren’t supposed to be this turbulent.

But BP does yield 4.4%, earnings per share growth is forecast to hit 29% this year and 13% in 2014, lifting the yield to a forecast 5.5%. Today, you can buy it at 12.6 times earnings, although it was better value last October, at 7.5 times. The suffering isn’t over for BP investors, but the future looks brighter. As I always reckoned it would.

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> Harvey owns shares in BP.