The political back-and-forth over whether or not BP should pay out a second-quarter dividend has been a sight to behold. Considering how the most recent two American presidents have been in a position to tell CEOs of the some of the largest U.S. finance and auto companies what to do—take this TARP money, get rid of your CEO—it feels almost natural for the Obama Administration and members of Congress to be demanding BP suspend its dividend to make sure there’s enough cash on hand to clean up the Gulf and pay out damage claims.
Not so in the U.K., where Obama’s popularity has plummeted along with BP’s share price. As the Daily Express recently put it, “Obama is Killing all our Pensions”—a complaint about both how his rhetoric is (ostensibly) driving down BP’s stock, and the demand for a suspended dividend.
BP has historically been pretty serious about its dividend. Shareholders have been getting a quarterly payout of 14 cents per share since mid-2008. As the company’s dividend policy states: “BP has a longstanding aim to return to shareholders all free cash flow in excess of investment needs, all other things being appropriate.”
The question, then, is whether or not we now fall into the realm of all other things not being appropriate. Michele della Vigna, who covers BP stock at Goldman Sachs, thinks we do. In a report earlier this week, della Vigna wrote that BP might very well cut or suspend its second-quarter dividend, which is due to be announced on July 27. The reasoning:
Our analysis implies that at a US$80/bl oil price, assuming maximum gearing of 40%, BP would have balance sheet headroom to meet US$11 bn of post-tax damages. On this basis, payment of greater damages might require a dividend cut / holiday or a rights issue. Consequently, we assume BP will take a holiday on the dividend payment in 2Q and 3Q, while uncertainties over damages are likely to very high, and will resume payments in 4Q at a reduced quarterly rate of US$10c.
In other words, until BP has a better feel for how much this spill is going to cost, it might do the prudent thing and save up some cash. You’ll notice, though, that there’s no reference to political pressure. Della Vigna comes to the conclusion that a dividend cut is in order simply based on the numbers.
But if BP does decide to cut its dividend, which is definitely being contemplated, Obama and other American politicians are sure to take the blame (or the credit)—even if the political shout-match had nothing to do with the decision.
And that will be a good thing for BP. In 2008, BP CEO Tony Hayward now-famously said, “I pay taxes so I don’t go to jail. I pay dividends so I don’t get fired.” If the dividend cut seems to be imposed from the outside, maybe BP shareholders will be happy with the man in charge for a bit longer.
