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They say it is nearly impossible to catch a falling knife. Investors that have tried to latch onto BP’s falling stock price have the bloody hands to prove that idiom to be true.

BP (BP) shares have been in freefall since the April 20 explosion on the Deepwater Horizon rig in the Gulf of Mexico. The stock has fallen 44% since April 20 and shares are down nearly 10% again Monday. This has resulted in BP losing over $92 billion in market cap.

The falling stock price has resulted in BP’s dividend yield being pushed ever higher. Today it stands at 10.8%, but few investors expect to be able capture that dividend. This lack of confidence has caused a glaring absence of value investors to help prop up BP’s sagging stock price.

Investors are not only wary that they may never see BP’s dividend payment, but there still is no clear understanding of how much the Gulf oil spill will end up costing BP or the impact this will have to future earnings.

It almost seems like déjà vu. It was only 18 months ago that JP Morgan (JPM), Citigroup (C), Bank of America (BAC) and even General Electric (GE) were in similar situations. Their stock prices were plummeting, driving their dividend yields near double digits. However, investors were almost certain that those dividends would need to be cut. Investors also had no clear idea of how much the cost of credit defaults would end up costing or the impact they would have on future earnings.

No one knew when to buy stock in these falling giants, but looking back there was a buy signal.

On January 16, Bank of America reduced their dividend by 97% to only $.01 per share. Seven weeks later, BAC’s stock hit rock bottom - closing at $3.14 per share. On February 23, JP Morgan Chase slashed its dividend by 87% down to only $.05 per share. Eleven days later, JPM’s stock price hit bottom – closing at $15.90 per share. On February 27, General Electric cut its dividend by 68% to only $.10 per share. Six days later, GE’s stock price hit bottom – closing at $6.66 per share.

Within days of announcing drastic dividend cuts, all three of these large cap stocks had bottomed and were beginning a dramatic recovery. The market had anticipated the dividend cuts in each case, but the stock price didn’t recover until after the dividend announcement had been made. Investors that had bought BAC, JPM, and GE stock after they announced their dividend cut would have earned would have earned impressive returns 16 months later.

It’s impossible to predict how low BP’s stock price will go or when it will hit rock bottom. However, if history is any indication, a few days after BP announces their dividend suspension will be when to buy BP stock.

Disclosure: No Positions

Source: When to Buy BP