BP had a bad day yesterday with the news that they could be liable for additional damages up to $18B in the oil spill from 2010. This is in addition to the penalties and damages already paid out. The stock dropped close to 6%.
However, this gave me an opportunity to initiate a position in the stock. I purchased 33 shares at $45.30 on 9/4/2014. With commission, the total cost comes to $1,501.90. With a quarterly dividend of $0.585/share, the yield comes to 5.16% and this purchase adds $77.22 to my forward annual dividends.
Between 2010 and 2012, BP had to sell off assets and cut the dividend to fund the damages and other penalties. BP mentioned that they are going to appeal the latest decision and this process could take years to be resolved. I am not sure what BP intends to do to fund the new damages if it has to pay the entire projected 18B.
But the company is attractively valued with a P/E of 12.3 and a forward P/E of just 5.5. Between 2004 and 2013, its revenue has increased from 285,059 Mil to 396,217 Mil which represents a CAGR of 3.72%. During the same period, the net income has increased from 15,731 Mil to 23,451 Mil representing a CAGR of 4.53%.
The number of outstanding shares has gone down from 3637 Mil at the end of 2004 to 3155 Mil at the end of 2013. This represents an annual reduction of 1.57%. This and increased income has resulted in the EPS increasing from 4.32 to 7.43 during the same period representing a CAGR of 6.21%. But the EPS and Net Income has not been consistent primarily due to the issues relating to the oil spill.
Morningstar has a fair value of $59.00 for the stock and it is rated 4 stars.
The purchase at this time could be a risky one especially because of the potentially high penalties. But with a growing revenue and high yield, it is a risk worth taking for me. Let’s wait and see how this plays out.
The portfolio page will be updated soon to reflect this purchase.
Disclosure: Long BP
Image courtesy: bp.com