The BP (LSE: BP) (NYSE: BP.US) share price is still suffering today, more than four years after the Deepwater Horizon blowout led to the biggest accidental oil spill in the history of the industry.
Although, at 470p, the shares are beating the FTSE 100 over the past 12 months with a gain of 6%, we’re still looking at a five-year fall of 10% while the index has put on 40%. Does that make BP shares too cheap? I think so, and here’s why:
1. Maximum pessimism
In any share price disaster, there comes a time of maximum pessimism (MP) — when everyone thinks everything is wrong and the bear to bull ratio is at its highest. It’s hard to say when that was with BP — possibly in mid-2010 right after the disaster, but the tail-end of 2011 was looking pretty grim too as the full financial cost was becoming clearer.
The time of MP is surely in the past now, but the gloom and despondency just can’t be shaken off. And if we wait until everybody’s happy again it’ll be too late to grab shares at close to MP pricing.
2. Disaster’s end
The disaster, bad though it was, genuinely is coming to an end. There are legal issues still being fought over, with BP trying to stop some claims that have not been properly proven and the US courts not really helping. But the bulk of the cost is known and has been paid or set aside, and BP is becoming more and more able to focus on restructuring to offload lower-margin assets, on minimizing upstream exploration costs, and all those year-to-year things that are just part of running a big oil business.
Part of that is rewarding shareholders in the best way it can…
3. Dividends rising
A look at BP’s dividend shows just how undervalued the shares really are.
Since the dividend was slashed in 2010, we’ve seen a strong comeback, with a yield of 4.5% paid in 2013. Analysts have 5% penciled in for this year followed by 5.3% next, and those are some of the best yields in the FTSE 100.
Couple that with a forward P/E of under 10 this year, dropping to 9 for 2015, and with those dividends expected to be more than twice-covered by earnings — and can you see why I think BP shares are cheap right now?
