How BP plc Could Surge 70% In 5 Years

BP plc (LON:BP) could be set to reward investors today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BPThe shares of oil supermajor BP (LSE: BP) (NYSE: BP.US), currently trading at 508p, have gained just 2% over the last five years, well behind the FTSE 100, which has put on 57%.

However, the story could change over the next five years, as BP’s shares have the potential to advance by 70%.

Here’s how

The Deepwater Horizon rig explosion and resulting massive oil spill in the Gulf of Mexico just over four years ago have blown a hole in BP’s five-year share performance. That the price has advanced at all, given the huge financial liabilities and reputational damage suffered, is testament to the durability of big companies, even in the face of extreme circumstances.

As a result of the oil spill, BP was obliged to embark on a huge divestment of assets and restructuring, becoming a smaller, leaner company. In some ways this has proved to be a blessing in disguise. Industry-wide pressures, including rising exploration costs, have seen all the big oil companies moving to shed non-core assets and focusing on their most profitable projects.

While BP has further asset sales in the pipeline, and the legacy of the oil spill will run for many years, most of the heavy work is behind the company, and City analysts see steady earnings progress over the next five years.

The analysts are forecasting that BP’s earnings per share (EPS) will increase at a compound annual growth rate (CAGR) of 4.7% from last year’s 43p to 54p by the year ending December 2018 — a total increase of 26%.

If the shares track earnings, and continue to rate on their current trailing price-to-earnings (P/E) ratio of 11.8, the price will of course rise by the same 26% as EPS, putting BP’s shares at about 638p.

However, visibility on the go-forward BP’s asset base, earnings, as well as the quantum and timing of remaining oil spill-related payouts, should be improving all the time, and it may be that the shares have re-rate higher after the passage of five years. If they re-rated to the FTSE 100’s long-term historic average P/E of 16, we’d see the price at 864p — a 70% rise from today’s 508p.

Investors would also bag five years of decent dividends. The trailing yield of 4.5% is above the FTSE 100’s 3.5%, although analysts see income growth being tempered by a five-year dividend CAGR of 3.2% — below the EPS CAGR — as dividend cover ticks up from 1.9 to 2. We’d see a total of 127p a share of dividends paid out over the period. Put another way, a £1,000 investment in BP today would deliver £250 in dividends alone.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester does not own any shares mentioned in this article.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »