Beat the Fiscal Cliff with BP
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With one day left until America hurtles over the so-called “fiscal cliff,” it’s probably time to consider appropriate investing strategies moving forward. Don’t get me wrong, the fiscal cliff is not to be considered a binary event. However, politicians personally stand to benefit from resolving the issues facing America’s budget after the effects of the fiscal cliff have been felt because then they will technically be lowering taxes and increasing spending—and we all know how politicians love to boast about that. Accordingly, I would look for a deal by late January or early February. Furthermore, as we have seen thus far, there will be no deal without significant concessions coming from both sides of the aisle. In other words, investors will certainly be impacted in some way, shape, or form.
The implications of the fiscal cliff faced by investors are clearly out of their control. It is most appropriate, therefore, to consider what the market’s response will be. Let us assume that the qualified dividend distinction will be dropped, thereby allowing dividends to be taxed as ordinary income. Since many dividend recipients are high net-worth individuals seeking to preserve wealth rather than create it through investing, such a tax increase would be substantial. To compensate, I believe the market will be forced to seek out higher yielding investing instruments. Due to the current actions of central banks around the world, bonds simply don’t offer enough interest to divert funds in their direction. This is favorable for large, stable companies in attractive industries that offer a high dividend yield.
Which brings me to the company at the heart of this article: BP plc (NYSE: BP). BP currently offers a dividend yield of 5.19% to investors. The dividend offered by BP has historically been among the most stable, increasing every year out of the last twenty except for two: 2003 and (of course) 2010. This is intuitive for oil and gas—ultimately the foundations of BP’s business—are practically inelastic goods. I’m not going to pretend to be able to predict global demand for energy, but it is safe to say that it is relatively stable barring truly magnificent economic developments. Furthermore, its stock has yet to recover from the mishap in the Gulf Coast two years ago and remains perhaps the cheapest of its peer group with a P/E ratio of 7.53. To put that in perspective, consider Chevron Corporation’s (NYSE: CVX) P/E ratio of 8.82, ExxonMobil Corporation’s (NYSE: XOM) 9.46, and the industry average of 10.49.
The combination of BP’s dividend yield and relative cheapness, in addition to its secure positioning as a practically essential oil and gas provider, make it a win-win. If, for any reason outside the company’s fundamental operations, the market beats down BP’s share price, then the dividend yield will grow and the stock will look that much more attractive.
The company could also benefit from the massive transition occurring in America’s oil and gas situation. As I am sure you are aware, the United States has a glut of natural gas that is becoming accessible and available through hydraulic fracturing and horizontal drilling. These wells, however, are not located in America’s traditional oil basins (i.e. Texas, the Gulf Coast) but rather states like South Dakota. Accordingly, oil and gas transportation systems become increasingly vital. BP, as it turns out, is America’s “second-largest liquids pipeline company, transporting more than 1.6 million barrels per day of oil and refined products, natural gas liquids, carbon dioxide and chemicals,” according to their website. Moreover, pipelines are the most efficient method of transportation in comparison to the alternatives such as rail or barge. As you can see, BP is fairly well-positioned moving forward.
Right now, it is ultimately BP’s dividend yield that makes it an attractive stock to buy and hold. Currently sitting above 5%, BP could attract investors fleeing securities with lower dividend and interest yields. Although BP may be the cheapest in its peer group right now, perhaps suffering lingering effects from the oil spill in 2010; it may not be that way for long if the company performs well during this transitional period within the oil and gas industry. Whether it is through dividends or share price appreciation, BP could be a valuable component of your portfolio.
Fool blogger Eric Tommarello does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!