Just when you thought you’d never hear a cheerful financial news story again, along comes BP (LON:BP).
The oil giant once again thrashed City expectations (for the third time in a row) with its third quarter figures. Replacement cost profits more than doubled to £6.4bn. The group also raised its dividend by a full 64% compared to the same quarter last year.
You might think that politicians would be happy about it. After all, at least some companies are still competently run and able to contribute money to Britain’s tax coffers. It’s much more than can be said for the banks, for example.
But we should know better than that. To believe that politicians would welcome an oil company’s record profits, you’d also have to believe that integrity and economic literacy had suddenly become common place in the House of Commons.
As if…
Why the government should be grateful to BP
Here’s a fascinating statistic. BP accounts for more than £1 in every £10 in dividend income paid out to pension funds by FTSE 100 companies. That’s pretty impressive. And on top of that, it’s also likely to be “the Treasury’s single biggest benefactor” this year, says Damian Reece in The Telegraph, stumping up tax to the tune of £6.5bn.
So not only is BP contributing hugely to our collective private pension funds, it’s also going a long way to stumping up a big chunk of the cash that’s bailing out our beleaguered banking sector.
Then there’s the small matter of confidence. To my mind, the importance of confidence is somewhat over-rated – the lack of confidence we see now in markets is a rational reaction to economic reality, not something that’s been created by scary headlines in the press. It’s a symptom, not the cause, of the downturn.
But plenty of pundits would disagree. And there’s no doubt that BP’s results gave the market a bit of a shot in the arm yesterday. It’s the kind of thing that gets people thinking that, even if the overall outlook is grim, some stocks really are cheap at current levels.
So overall, there’s quite a lot to be grateful for. You’d think our Prime Minister would be trying to claim credit for this success story somehow. But that’d be too much to hope for. Gordon Brown just loves a bandwagon, so in-between sticking his oar into the debate on idiot DJs, rather than praising BP, he managed to squeeze out an indignant statement on petrol prices.
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“We’re trying to help hard-pressed families through difficult times, while calling on the energy companies to pass on the falling gas and oil prices to customers.” The usual more strident calls for tighter regulation and windfall taxes were also heard from the usual voices. Labour MP John McDonnell declared this was “a grotesquely obscene level of profiteering by BP and I will be calling in Parliament for price controls and profit windfall taxes.”
As Neil Collins points out in the Evening Standard, it’s a wonder that BP puts up with it – after all, it makes just four percent of its global petrol sales here. “Given the political cost, low profitability, and marginal nature of BP’s retail presence in Britain, you have to wonder why it doesn’t take its name out of the forecourts altogether.”
The danger of windfall taxes
Windfall taxes are a bad idea because oil companies need money to explore and find more oil. If you tax them every time their profits rise above a certain level, then they will either find crafty ways to avoid paying those taxes, or oil exploration will suffer.
And of course, there’s every chance that BP’s profits could go lower from here. Oil prices have fallen a great deal in recent months, and while it looks as though they’re stalling at around the $60 a barrel mark, there’s no guarantee they won’t go lower still. And if that happens, no one will be suggesting that we subsidise oil companies (unlike the banks, the taxpayer won’t be lining up to throw money at BP if it makes stupid business decisions and goes bust).
But the good news is, that’s highly unlikely to happen. BP will still be around once this recession has passed, and that’s as important a consideration as any other in this market. We’ve long been fans of BP, and tipped it again in the cover story of the current issue along with two other stocks (if you’re not a subscriber, subscribe to MoneyWeek magazine). It’s bounced somewhat since then, but with a dividend yield of 5.4%, I don’t think it’s too late to buy by any means – just be prepared for the share price to be very volatile, along with the wider market, for the foreseeable future.
This lack of certainty just now makes it very tough to decide where to put your money, right down to the safety, or otherwise, of your bank account. And it seems that the super-rich are facing the same dilemma. My colleague Dominic Frisby had a chat with Dutch millionaire Francis Claessens, founder of a networking group for high-net worth individuals, and asked him where the hugely wealthy are putting their money right now – read: What the super-rich are doing with their money.
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