I have written about BP several times before on this site, as the company is one in which the reputation of the firm has created a historic opportunity due to the lingering memory of the oil spill and the litigation that has come after.
A frequent theme, though, on this site is that you need to be empowered to find those times when the fundamentals of a company are much better than a company’s reputation, and I have cited to McDonald’s and Johnson & Johnson in the past to illustrate the concept. The best example of a stock now, here in the moment, suffering from the same phenomenon is BP.
It’s spoken about as if the company is roadkill, a shadow of its former self. The company’s reputation is a far cry away from its business strength as the company is set to make almost $15 billion this year. In net profit. It’s amazing how little that factoid comes up in discussion.
What I find most intriguing? This: Since temporarily suspending its dividend in 2010 because of the oil spill, BP has paid $1.68 in 2011 dividends, $1.98 in 2012 dividends, $2.19 in 2013 dividends, and an estimated $2.32 in 2014 dividends. In other words, each share will have collected $8.17 in total dividends since the oil spill.
Not only was BP’s dividend on the mend since the oil spill, but for people that chose to reinvest, they were able to do it an average share price of $38.15 per share due to the uncertainty created by the oil spill.
If you had 100 shares, you would have received $817 by the end of 2014, which would have gotten reinvested at an average price of $39.15, netting you a bit over 20 additional shares of stock. This is the stuff that gets skipped over when conversations about long-term dividend investing come up.
Most people, if you asked them on the street, would probably guess that BP has been a disaster investment since the oil. Unless you study this stuff, it’s not necessarily intuitive how 10,000 shares can automatically turn into 12,000 shares over the course of a couple years.
What if you owned BP before the oil spill?
From an income perspective, it looks something like this:
Before the oil spill, BP was paying out $0.84 per share in quarterly dividends for an annual rate of $3.36 in dividends. Someone who owned 1,000 shares before the spill happened would have been collecting $3,360 in annual dividend income.
From 2010 through 2014, those 1,000 shares would grown to a little over 1,200 shares due to dividend reinvestment. At the current rate of $2.32, you would be collecting $2,784 in annual income. That is because BP had to auction off about a third of its business to pay for litigation costs associated with the spill.
By the way, this is why people do blue-chip investing. If you held before the oil spill, the consequence of a worst-case scenario is that your income gets knocked down a bit, and then slowly starts to rebuild. You’re not dealing with 100% wipeout risk here. You’re collecting checks of $2,000-$2,700 for a few years instead of $3,300.
For investors that bought after the oil spill, BP is a life-changing investment if you were aggressive with the amount of stock you bought. Heck, it’s still offering investors a good deal—for most of its history, it was like Exxon in that it yielded around 2.5% to 3.5%. The cloud of uncertainty still hangs a bit, and you can get a slightly better than average deal by buying some of the stock today (which, compared to the general expensiveness in the rest of the market, isn’t so bad).
The fact that every 5 shares of BP owned since the oil spill has produced 1 new share is an important part of the wealth creation story. Let the pundits and guys on CNBC talk about how BP was trading in the $70s and $80s before the oil spill, and is still well below its previous highs. They can have that story. I’m interested in the story of dividend recovery and wealth-creation, as reinvested dividends from BP have really started to pile up since 2010, bringing burned investors closer to their previous income highs while the post-spill investors made an investment of a lifetime if they bought BP, parked it, and plan on reinvesting or spending the dividends for the next couple of decades.
Originally posted 2014-09-03 08:00:57.