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Can the BP share price double your money?

You probably think that it would be difficult to double your money with a £100bn blue-chip stock such as BP (LSE: BP).

Investors have certainly shown little enthusiasm for the oil and gas giant in recent months — the BP share price has fallen by about 17% since peaking at 583p in April.

However, focusing on the share price alone could be a mistake. As I’ll explain in this article, I think is could be quite easy to double your money with BP shares.

Double your money in 11 years

Mature FTSE 100 companies like BP tend to deliver their shareholder returns in several different ways.

Rather than relying on rapid profit growth and a rising share price, they pay generous dividends. They may also buy back and cancel their own shares, to increase earnings per share. This tends to support a higher share price.

At the time of writing, BP shares offer a dividend yield of about 6.5%.

If we assume that the share price and dividend remain unchanged, I estimate that by using each year’s dividends to buy more shares, you could double your original investment in 11 years.

Will things improve for BP?

In reality, share prices and dividends rarely stay the same for 11 years. A more likely scenario is that the shares will go up and down, while dividends will hopefully increase.

Valuing BP shares is made more complicated by fears that the company will never be able to produce all of its reserves. Some investors argue that oil demand could slump over the next 20 years — or that new environmental regulations will make oil production unviable.

I don’t know what’s going to happen. But I think the current pessimism about BP is overdone. Indeed, I think now could be a good time to be buying the group’s stock, for several reasons.

New boss: Incoming chief executive Bernard Looney is 15 years younger than his predecessor Bob Dudley. According to chairman Helge Lund, Mr Looney’s brief is to help BP “chart its course through the energy transition”.

I believe that senior oil industry execs like Mr Looney understand that major changes will be needed. They also have far more visibility than we do of current and future demand trends for oil and gas.

To start with, I expect Mr Looney to chart a course that will prioritise cash generation from oil, while putting in place longer-term plans to increase gas production and invest in more sustainable methods of energy supply. Bigger changes may follow in the future.

Debt reduction: BP’s debt levels are currently higher than I’d like to see. Indeed, I think it’s fair to say that the group’s borrowings have become an obstacle to dividend growth.

However, outgoing CEO Mr Dudley has already started the process of reshaping the group’s operations and expects to see improved cash generation from next year.

This should help to cut debt and improve the level of free cash flow available for shareholder returns.

I’d buy BP today

At current levels, BP shares trade on 11 times 2020 forecast earnings and, as mentioned, offer a dividend yield of 6.5%.

I’d be happy to buy at this level, and believe that investors have a good chance of doubling their cash over the next decade or so.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.