LONDON — What kind of shares should you be choosing for your ISA? Well, in my view the tax-efficient investment wrapper is best suited to decades-long investing in solid blue-chip shares. And for me, that means companies such as BP Inc. (LSE:BP) (NYSE:BP).
But first, remember that this year’s allowance of £11,280 must be used by April 5, and don’t forget within an ISA that all share-price appreciation is tax-free and there is no additional tax to be paid on dividends — click here for more information on ISAs.
What about the disaster?
To many people, BP Inc. (LSE:BP) (NYSE:BP) means disaster: the Gulf of Mexico oil spill, to be specific. And it certainly cost the company dearly — as of BP Inc. (LSE:BP) (NYSE:BP)’s full-year results published on Feb. 5, the estimated total hit was $42 billion. And with various asset sales raising the cash to cover the costs, BP Inc. (LSE:BP) (NYSE:BP) lost some downstream capacity and ended up with production 6% down and full-year profits 19% down.
But events such as the Gulf spill are not things we can predict, and there is always a risk of catastrophe in any investment we make — which is one good reason for holding a diversified ISA portfolio. And anyway, just how badly did things actually go for BP Inc. (LSE:BP) (NYSE:BP) investors?
Assuming you bought the shares five years ago, you’d have paid around 530 pence each for them. Today they’re worth 453 pence, so you’d be down 77 pence per share, or 14.5%. But over the period, you’d have accumulated 113 pence per share from dividends, taking your current valuation up to 566 pence per share. Over one of BP Inc. (LSE:BP) (NYSE:BP)’s worst periods, you’d still have made a profit of 7% — not a great return over five years, but not a financial tragedy either.
Looking forward, not backward
Assuming there isn’t another major disaster in the near future, how well are you likely to do if you pop some BP Inc. (LSE:BP) (NYSE:BP) shares into your ISA now?
Current City forecasts suggest BP Inc. (LSE:BP) (NYSE:BP) will enjoy a rebound in earnings per share for 2013 of about 40%, putting the shares on a forward P/E ratio of just 8. To put that into perspective, the long-term average P/E ratio of the FTSE 100 is about 14 — BP’s shares are currently valued at little over half of that!
And don’t forget those dividends. Analysts are currently forecasting a dividend this year of around 23 pence per share. That’s a 10% increase on the 2012 payout and represents a very nice 5.1% yield on the current share price.