Just when we thought the oil crisis was over, the price has started to slide again. From a high of more than $85 per barrel, Brent Crude has now slumped as low as $60. Could we be heading back to $30 once more? It’s certainly affected confidence in BP (LSE: BP), whose shares are down 12% since early October.
At the same time, Bitcoin is rearing its ugly head again. Investors are becoming more and more interested in the blockchain cash as its price has been plummeting. It fell as low as $3,448 per coin this past weekend, before firming up at around the $4,000 level.
Bitcoin has lost about 50% of its value in the past fortnight, which is something that those who reckon shares are risky should think about. And that’s nothing compared to the losses that gamblers who bought in at the peak of more than $19,000 will have suffered.
Bubble
Yet with excitement building once again, we’ve even got cryptocurrency enthusiasts speculating about the ethereal stuff reaching $100,000. To me that sounds even madder than share valuations at the height of the tech stock bubble.
And yes, we are getting people thinking about transferring wealth from shares, like BP, to cryptocurrencies again. I’ll tell you why I think that is a very bad idea quite simply — one is an investment and the other isn’t.
Take BP. We can put some sort of rational valuation on the company based on the worldwide demand for oil, on the profits it’s been making and is almost certain to continue making in the long term, and on the actual real cash that it is generating for its shareholders.
Real cash
BP is forecast to pay dividends of approximately 32p per share this year and next, having kept its annual payments going right through the sub-$30 oil days, and that represents the actual conversion of real tangible assets from the earth into cash.
The payments weren’t covered by earnings during the worst days of the slump, but that doesn’t really matter for a company with the resources of BP and with a strategy of paying dependable long-term dividends. The dividend was cut after the Deepwater Horizon disaster, but it didn’t stay low for very long and yields were quickly back up — and that’s about the worst that’s happened.
On today’s share price, BP’s dividends are set to provide a yield of more than 6% per year, and I see that as one of the most reliable in the FTSE 100. So why are the shares trading on forward P/E multiples of only 10 to 11? Because of an over-reaction to falling oil, I say.
Tangible
And at least BP has things like P/E ratios and dividend yields, and a whole host of other measurements by which we can assess its performance and try to put a rational valuation on its shares. BP generates real cash too — did I already say that?
Bitcoin has nothing. It produces nothing. It has nothing backing it. It has no tangible valuation whatsoever. And you’ve got no way of guessing where its price will go tomorrow other than random guesswork. As I say, that is not an investment.