Can BP plc's total return beat the wider market?
To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators as well as buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at BP (LSE: BP) (NYSE: BP.US), which is a well-known oil exploration and production company and currently occupies the second spot in London's premier share index.
With the shares at 455p, BP's market cap is £87,078 million.
This table summarises the firm's recent financial record:
|Year to December||2007||2008||2009||2010||2011|
|Net cash from operations ($m)||24,709||38,095||27,716||13,616||22,154|
|Adjusted earnings per share||108.76cents||112.59c||88.49c||(19.81c)||135.93c|
|Dividend per share||45.5c||55.5c||56c||21c||29c|
The table shows the financial effect of BP's disaster in the Gulf of Mexico during 2010, when the Macondo well blew-out sadly killing 11 rig operatives and spewing oil into the Gulf for around three months. BP's considerable efforts eventually led to the successful plugging of the gusher, but the firm showed a loss that year, axed three quarterly dividends and the share price plunged to as low as about 300p.
However, to me, the investment story has always been about BP's ability to generate consistent cash flow and, on that score, the table shows a better performance. That happy situation has enabled the company to cope with its on-going Gulf liabilities, continue to invest strategically and return free cash back to investors by restoring and increasing the dividend.
Since the Gulf disaster, BP has re-focused its strategy and engaged in a policy of more active portfolio management. We can see evidence of that from the string of assets sold since the Gulf spill as the firm seeks to target high-potential exploration opportunities. On that front, the recent deal in Russia seems encouraging, where BP has partnered with, and now owns 19.75% of, state-controlled oil and gas enterprise Rosneft.
BP's total-return potential
Scoring each out of five, let's examine five indicators to help judge the quality of BP's total-return potential:
1. Dividend cover: earnings covered the 2011 dividend more than four times. 5/5
2. Borrowings: at the last count, net gearing was around 26%. 4/5
3. Growth: revenue, earnings and cash flow have all been growing since the Gulf-disaster. 5/5
4. Price to earnings: a forward 7.5 compares well to growth and yield forecasts. 4/5
5. Outlook: satisfactory recent trading with a cautiously positive outlook. 4/5
Overall, I score BP 22 out of 25, which encourages me to believe BP has potential to outpace the wider market's total return going forward.
Despite the on-going drag on cash flow from the Gulf of Mexico disaster, with still-to-be quantified US government fines yet to be paid, the business is trading well as the scoring shows. Because of the uncertainty in the US, the shares appear to offer reasonable value, too.
When the Macondo fall-out is finally behind BP, more free cash should be available for the company to invest and to return to shareholders. That potential 'double whammy' could lead to a rising share price and a rising dividend. That encourages me to believe that, yes, I should invest in BP.
BP is not only oil and gas company I am evaluating right now. Indeed, oil and gas exploration and production (E&P) companies can be a rich source of multi-bagging investment opportunities and I've had my fair share of investment success by investing in oil companies much smaller than BP.
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Kevin owns shares in BP.