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Can BP plc ever return to £6?

BP (LSE: BP) has always done its best to maintain its reputation as one of the UK’s best dividend stocks. Unfortunately, when it comes to capital growth, the company has what can only be called an abysmal record.

Since 1998 the shares have returned a total of 0.8%, underperforming the FTSE 100 by 20%. Over the past 10 years, the performance is even worse. Since mid-2007 the shares have underperformed the FTSE 100 by around 31%. Still, if you add income received over this period the total return is around 17.3%. That’s around 3% less than the FTSE 100 excluding dividends, but is positive nonetheless.

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However, BP’s share price performance could be about to turn a corner thanks to a new way of thinking about the business.

Unloved

BP has been for many decades a stalwart of income portfolios, but this is starting to change as institutional investors rotate away from undesirable polluting stocks under pressure from investors. The world is also shifting away from hydrocarbon power, the change is gradual, but momentum is building.

These changes indicate that BP might end up becoming some sort of sin stock, which is great news for the remaining shareholders.

You see, sin stocks such as tobacco, gambling and alcohol tend to outperform the market in aggregate, according to several studies on the topic. It’s unclear exactly why these companies outperform, but in most cases, stocks that do the best are the ones that go unnoticed by the wider market. They rise with the broader market but don’t fall as much in bear markets, possibly because their core shareholders are more focused on the long-term performance of the business, rather than day-to-day market swings.

If BP can achieve this status, it will be great for the company’s share price. Today, many market participants believe the company’s dividend isn’t sustainable at current levels, even though management has reiterated its commitment to the payout several times. Investors selling the stock and hedge funds betting against the company are keeping the shares down. But if the company fades into the background by becoming a sin business, the shares might be granted a new lease of life as speculators move on to a different target and BP’s core investor base continues to support the firm.

In this scenario it is highly likely that shares in BP would trade up to a level where the company’s dividend yield is closer to the market average. A dividend yield of around 4.5% to 5% seems appropriate. The City is forecasting a payout of 31.6p per share for the company this year, which would imply a share price of 650p for a yield of 4.9%, at the top end of my range.

The bottom line

So overall, if BP falls out of the limelight as the world transitions into a low hydrocarbon future, it’s likely shares in the company will rise as the group’s core investor base throws its weight behind the firm. As renewable energy development continues to gain traction, this may occur sooner than you think.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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