What BP Oil Spill Disaster Can Teach Investors
June 22, 2010 — -- Investors, take notice. The BP oil spill has taught us once again that no stock is immune from potential disaster.
No matter how rock-solid a particular stock has been, risk always looms on the horizon. That's why staking your financial future on just one or two stocks is plain foolish.
History tells us many investors will ignore this latest lesson. Why should things be any different this time than when Enron emerged as a fraud, General Motors filed for bankruptcy or Bank of America slashed its juicy dividend?
In each case, average investors took the hit for corporate failures. They were left with worthless shares or disappearing income.
I'll hope this time that retirees, 401(k) participants and other individual investors will heed the lessons of the BP disaster and avoid holding more than 10 percent of their overall portfolio in a single company's stock.
For that reason, let's review what's happened to BP shareholders since the oil rig explosion on the evening of April 20 that has devastated the Gulf of Mexico region.
That afternoon, BP's share price on the New York Stock Exchange had closed at $60.48, up 55 percent over the previous 12 months. (Since BP PLC is a foreign company, American investors actually buy BP's ADRs, or American Depository Receipts, which represent shares in a foreign company owned on their behalf by a large American bank.)
At the time, BP stock paid an annual dividend of $3.36 per share, a yield of 5.6 percent. Things couldn't be better for BP shareholders, it seemed.
But without warning to investors as well as Gulf Coast residents, disaster struck.
As a result, BP shares have lost nearly half their value, and the company's above-average dividend has been cut to zero as the company sets up a $20 billion reserve to cover damages resulting from the oil spill.
If you owned 1,000 shares of BP, on April 20th they were worth more than $60,000 and paid annual dividends of nearly $3,400. Today, your 1,000 shares are worth less than $31,000, and there are no dividend payments in sight.
