BP (LSE: BP) is one of the biggest companies in the UK and a major component of the Footsie 100. Because the company is so big, you might be wondering why I believe the BP share price could double your money.
Indeed, a common saying among investors is “elephants don’t run,” which implies big companies usually generate modest returns. The law of large numbers means it is much harder for a company like BP to grow than a smaller producer such as Premier Oil.
However, I am confident the BP share price will produce fantastic returns for investors over the next few years, and today I’m going to explain why.
Slow and steady
I will admit that if you want to make a lot of money very quickly, then BP probably isn’t the right company for you. I believe the shares can help you double your money over the medium-to-long term, which in my opinion is a much more attractive proposition than trying to speculate on small-cap stocks in an attempt to double your money in just a few days.
A speculative approach comes with much more risk than investing in blue-chips like BP, and you are much more likely to lose everything than make money.
As BP is one of the world’s largest oil companies, I do not think it is unreasonable to say that this is a relatively safe investment and should still be producing returns for investors five or 10 years from now.
So, how long will it take you to double your money with BP? Well, for a start, at the time of writing shares in the company support a dividend yield of 5.4% which implies that £1,000 investment in the shares would double in value in roughly 13 years, assuming the share price stays where it is today.
I think it is improbable that the BP share price will languish at current levels for the next 13 years. You see, compared to the company’s international peers, notably ExxonMobil and Chevron, shares in the business look cheap at current levels.
For a start, shares in both of these businesses are currently trading at an average forward P/E of 17, compared to BP’s 13.8. Further, ExxonMobil and Chevron are dealing at an average enterprise value-to-earnings before interest tax depreciation and amortisation (EV/EBITDA) average of 8.7, 34% higher than BP’s current valuation.
These figures suggest to me that the BP share price could be worth 30% more than it is today, although I cannot say for sure when this valuation gap will close.
Double your money
Still, I’m confident over the long term that BP’s shares can attract the same valuation as its larger American peers, which implies potential capital gains of 30% from current levels. That is on top of the 31p per share annual dividend.
According to my calculations, this capital growth coupled with income is enough to double investors’ money in just 10 years, which might seem like a long time, but considering there’s minimal risk involved here, it is a fantastic trade.
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Rupert Hargreaves owns no share 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.
Motley Fool UK 2019