David Holding thinks BP looks cheap.
On the episode of The Simpsons I watched yesterday, Lisa said to Homer something like: “In China, the word for crisis is the same as the word for opportunity.” It seems this may be a misconception in reality, but why let mere facts spoil the point?
Crisis or opportunity?
The world is very definitely in a financial crisis. Western economies depend on confidence to function properly and that confidence has all but disappeared at the moment despite the huge shoring up attempts of governments around the globe. So are there opportunities and if so, where?
The panic sweeping markets has, of course, dragged down the wheat with the chaff. BP (LSE: BP.) for example, has seen its share price slide from 650p in May to 389p as I write. The company’s share price more or less mirrors the oil price as the chart shows. And as the world awaits recession, the presumption is that less oil will be used so the price drops. Only time will tell if this is the correct assumption.
Buying itself back
But all this doesn’t seem to be altering the company’s plans one iota. It seems like there’s a BP announcement every day announcing a share buy-back. Since 2000, BP has spent a staggering $51 billion buying back its own shares.
Most of these purchases may look foolish in hindsight. How wise do the big banks’ buy-backs look in these days where liquidity is paramount? And the odd $51 billion would come in handy just now to hoover up the shares at a new low, or maybe even to pay beleaguered shareholders a special dividend as a lean Christmas looms on the horizon.
Better still, perhaps, BP could buy up a basket-load of the many smaller oil-producing company bargains presenting themselves in the current market turmoil. The company finds itself in a position, today, where it is finding it increasingly difficult to replace the reserves of oil that it is producing. This discussion thread explores these issues, whilst this thread discusses BP at its new bargain basement price.
Buying quality on weakness
With the shares trading at 389p, the monolith is valued at £72.7bn and the shares are on a current price-to-earnings ratio of 4.7. The historic yield is just under 6% whilst the prospective yield may be as high as 7.45% or more for the current year.
Such fundamentals seem to go out of the window at times like these, however. I’m sure there’s an army of analysts paid a fortune to analyse BP every day – but I prefer the simple approach of buying quality on weakness and taking the dividends for years to come.
These are rare times indeed. And it’s rare we get the opportunity to buy such a quality company on such a low rating.
David owns shares in BP.
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