Way back in 1974, I was just a little boy in short trousers. However, 46 years ago, legendary investor and future billionaire Warren Buffett voiced this simple but incredibly powerful remark. He said, “In the short run, [the market] is a voting machine; in the long run, it’s a weighing machine”. Right now, I believe many FTSE 100 shares are being battered by the market’s reckless voting.
Even FTSE 100 shares can become irrational
As I watch shares in world-class companies get bashed about in frantic trading, another potent market saying comes to mind: “Markets can stay irrational longer than you can stay solvent”.
Recently, I’ve seen plenty of irrationality in capital markets. For example, I’m puzzled to see the debt of very weak companies snapped up at interest rates so low that they cannot possibly compensate for the risk of default. Likewise, I’m bemused to see shares in near-bankrupt companies soaring, with some doubling or tripling within mere days.
This FTSE 100 share fell by a sixth in a week
Volatile and irrational price movements aren’t confined to shares of market tiddlers and tinpot companies. Extreme price movements among FTSE 100 constituents have also left me troubled.
Unfortunately, that article turned out to be horribly ill-timed. Back then, BP shares were changing hands at 369p. Within a week, they had plunged by over a sixth (16.8%), diving as low as 307p on Monday morning.
What happened to BP?
It’s important to understand that, as far as BP and its global operations are concerned, absolutely nothing happened in the course of that week. In particular, the oil price didn’t suddenly plummet – indeed, the price of a barrel of Brent crude is largely unchanged at around $40.
What did happen was investors panicked at the possibility of a second wave of Coronavirus cases. As shareholders rushed to sell, the FTSE 100 tumbled by 500 points (8%), before bouncing back on Monday afternoon.
In short, the steep and sudden collapse in BP’s share price was merely caused by one of the market’s frequent, short-lived panics.
Falling share price? Higher dividend yield!
I repeat: nothing has changed about BP’s business, its financials, or its market. Even so, momentum-driven selling has knocked about £10bn from BP’s value, reducing it to £65bn. Frankly, that’s crazy.
Thanks to the sizeable fall in the BP share price, now 320.75p, its dividend has risen appreciably. In fact, it’s 10.2% – back into double digits, as it was during March’s market crash.
I suspect that, at some point in 2020–21, BP’s board could well lower its dividend. A cut of a third would reduce the yield to 6.8% a year, keeping BP among the highest-yielding mega-caps in the FTSE 100. Thus, for me, BP is a buy for income-seeking investors willing to ignore the market’s tantrums and, instead, focus on long-term value.
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Cliffdarcy 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.