BP plc’s Defeat Doesn’t Put Me Off

Some companies naturally have more news flow than others.

Indeed, BP (LSE: BP) (NYSE: BP.US) seems to be one of the stocks with the largest amount of news flow, perhaps because it is still embroiled in arguments concerning compensation payments for the Deepwater Horizon tragedy, where 15 people tragically lost their lives in 2010.

The latest piece of news flow was not good. BP was again rebuffed in its attempt to end compensation payments under the original settlement signed in 2010, as a judge ruled that there was “no credible evidence” to back-up the company’s argument that many of the claims have been fraudulent.

In response, BP said it will continue to highlight what it believes are fraudulent claims, although the decision looks unlikely to be overturned.

So, this news flow will inevitably put a lot of investors off investing in BP. Certainly, I can see why. BP is now likely to be required to continue to make payments and it could lead to further asset sales in future. This would shrink BP’s asset base, meaning profits are likely to be lower in future years and shares could struggle to outperform in the short to medium term at least.

Why, then, would you want to buy shares in the company?

Indeed, although the outlook may appear rather bleak, I believe that many of the problems are priced-in. Shares are very cheap at current levels, with BP trading on a price-to-earnings (P/E) ratio of just 11. This compares very favourably to both the FTSE 100 and the oil and gas industry group, which trade on P/Es of 15 and 12.5 respectively.

Furthermore, the market is forecasting very impressive earnings per share (EPS) growth over the next two years, with growth of 30% expected for 2013 and 16% anticipated in 2014. This puts BP on a price to earnings growth (PEG) ratio of around 0.5, indicating that shares are very cheap at current levels.

In addition, BP’s yield remains above-average. Shares currently yield an impressive 5.1%, with dividends per share expected to increase to around 25.5p in 2014. This puts BP on a forward yield of 5.75%, making it a viable option for income-seeking investors like me who are concerned about the twin effects of low savings rates and the potential for high inflation.

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> Peter owns shares in BP.