BP dividend: To pay or not to pay?

Not for the first time in recent weeks, BP has found itself in a no-win situation.

The more it says it can cope with whatever penalties are imposed on it to compensate for the Gulf oil spill, the more US politicians are entitled to ask whether they are high enough. If it’s not hurting, it’s not much of a punishment, after all.

But if the company throws its hands in the air and says its future is jeopardised by the scale of the liabilities, are the interests of the countless victims of this catastrophe any better served? Certainly the long-term deterrent for other oil companies would be higher if this destroys BP, but its short-term ability to fix the mess would undoubtedly suffer from a financial collapse.

The question has come to a head over the issue of whether BP should meet its routine dividend obligation to shareholders. On the basis of current estimates of fines and clean-up costs, this wealthy company ought to have enough cash resources to pay its dues in the Gulf and continue normal dividend payments. But if the politically acceptable level of penalty proves to be one that is unaffordable then, by definition, BP cannot afford to carry on the rest of its activities with any semblance of normality.

The problem is confounded by differing views of what a shareholder dividend means. In the US, dividends have a subtly different place in corporate culture. Many large companies barely pay them at all, preferring to reward shareholders more sporadically through one-off share buy-back schemes or allow large cash balances to accumulate for a rainy day.

British investors view dividends less as a one-off reward than as the price of maintaining access to the capital markets. Shareholders prefer blue-chip companies not to build up big cash buffers for unquantifiable future risks, but keep operating cash flowing steadily back to them. If otherwise profitable companies need an emergency recapitalisation, as many did after the financial crash last year, then shareholders are expected to put their hands in their pockets through a rights issue — a formal process of raising fresh money unheard of in the US market, but one that has patched up dozens of British balance sheets in the last 18 months.

BP could start hoarding cash now, but the signal it would send to investors was that this was a company no longer sure of its ability to raise fresh financing in future. The already-battered share price would plummet, the company’s credit rating (and therefore its ability to borrow) would also probably fall, and BP could easily fall into a vicious spiral of financial decline that would do nothing to help the clean-up operation.

In the long run, this may be what the company deserves. This is an environmental catastrophe without parallel where the pattern of negligent behaviour points firmly at BP. But if the ultimate price is to liquidate one of the world’s largest companies for every penny it has, then a few billion on this year’s dividend hardly amounts to asset-stripping. If the punitive damages are set any lower than “everything you’ve got”, maintaining a semblance of financial stability is in everyone’s long-term interests.

It might not look good, but not everything should be about PR.

Nils Pratley: Why BP should suspend its dividend
Faced with a US president who says he wants an “ass to kick”, BP keeps presenting its backside.

The company’s attempt to cling to its dividend is not smart. Oil is still belching from the seabed. While that is so, nobody can estimate sensibly the size of the eventual bill, even to the nearest $10-billion. So don’t send out a message that you’ve assessed the likely costs and concluded that a $10bn-a-year payment to shareholders is affordable. US politicians, understandably furious about an environmental catastrophe, will merely assume that BP is not hurting enough.

Yes, yes, the BP dividend is an important source of income for UK pension funds — last year it was 12% of all dividend distributions by UK listed companies. In normal circumstances, BP’s desire to protect these funds from financial pain would be commendable. Circumstances are not normal. The company is in a fight for its future. In that situation, the overwhelming priority for shareholders is protecting the long-term value of the company and its assets. If that implies a short-term dividend sacrifice, so be it.

The best response from BP would be along these lines: “We are suspending dividend payments to demonstrate our commitment to plugging the leak, cleaning up the spill and paying compensation to those affected.” And it would have been better if that statement had been made several weeks ago. If Obama now succeeds in forcing a suspension of dividends, BP’s shareholders face no income and their directors’ authority is weakened further.

None of which is to deny that some of the US administration’s statements are wildly over the top. The notion that BP should have to pay the wages of other companies’ workers laid off by the moratorium on deep-water drilling is absurd. There is no point in trying to bankrupt BP. But BP would be in a better position to resist the wacky demands if it accepts that Obama makes a fair point about dividends. – guardian.co.uk

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