BP’s dividend looks safer tonight

Editor’s note: This is about business and politics, so regular readers you’ve been warned if you prefer only sports.

I haven’t written much on the BP (NYSE: BP) oil spill in the Gulf of Mexico for a couple of reasons. First, as a shareholder in BP I have a specific position that wants BP to do whatever it takes to fix the problem and help the people of this region. I live in Alabama and want my neighbors restored to their position prior to the spill. I also believe this helps shareholder value by showing the company has the integrity to do the right thing. The company was doing this and I had no reason to comment. The second reason I haven’t written about the BP oil spill is that there hasn’t been much to say. The government has been incompetent, and it appears BP wasn’t ready to deal with a crisis of this magnitude. That has been said over and over and over and over again. However, there was an interesting story in the Telegraph that had me thinking about the dividend.

From the Telegraph: “There is particular anger at US interference in the company’s dividend policy. Earlier this week, two senators suggested BP should be banned from paying out to shareholders until the full clean-up costs are known. One fund manager said: ‘Who is Obama to dictate whether UK pension funds are paid a dividend? Others in a similar position have been able to pay dividends.’”

Also, “Tom Watson, the former Labour minister, was planning to table a Commons motion today in support of BP and urging MPs to understand the importance of the company to pensioners in this country. He said last night: ‘BP is perhaps the most strategically important company for Britain and for UK pensioners. I want to see the UK government defend the company while it is under this attack.’”

According to the report, BP paid out “£1 in every £6 paid out in dividends to British pension pots.”

With the dividend and market capitalization so important to the UK, BP’s dividend seems safer to my eye. Perhaps it is a biased and overly optimistic eye. However, BP looks too important for political rhetoric to destroy.

The largest question to my mind in trying to value BP going forward is not simply the size of the total cleanup bill, but what portion BP will ultimately be responsible to pay? What percentage of the tab will BP’s partners pay? What liability will Transocean and Halliburton face, if any? I haven’t found a good answer.

A drawback to BP is the growing anti-business environment in the U.S. It reduces my desire to hold U.S. equities. I continue to view China as a better place to invest. As a U.S. citizen, I find this troubling. Our country should do everything it can to encourage investment. Why should I be tempted to invest my dollars in China and create new jobs and opportunities there? However, the law seems more certain there than in the U.S. With bondholders screwed in the automaker bankruptcies and the rhetoric growing against BP, what is the point of doing business in the U.S.? The capitalism elsewhere looks better than the capitalism here. Something is truly wrong. The attempt to intimidate BP for political purposes is just the latest manifestation of it.

One last thought on BP. I had grown frustrated with the company’s leadership. I haven’t heard a good answer as to why the company failed to do a better job containing the spill per its disaster plan. I was beginning to worry about CEO Tony Hayward’s leadership. However, I am now a firm supporter of Hayward. When the president attacks you, it raises you in my estimation. The only advice I would give BP’s leadership at this moment is to stand firm at the growing idiocy coming out of Washington and work closer with the states.

8 Comments

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  1. 1
    DenyJuanHereme

    Good article Cappy! The Obama administration is going after BP officials saying the spill is criminal. If they decide to charge someone, then they better look for criminal chrges within their corridors. You can’t blame Bush (although Keith Olberman and MSNBC will) because the current administration was suppose to inspect the oil wells. Just who was in charge of that. We may never know.

  2. 2
    Jack

    I totally agree with you. I’ve never seen such arrogance on behalf of our government. This country is definitely becoming anti-business and too risky to invest in.

  3. 3
    Anonymous

    You are absolutely ridiculous. So your argument is just because pensioners will get affected, BP’s dividend should not be toiled with? What about the thousands of animals suffering and dying? How about the fishermen and all the other people who are losing their jobs and livelihood over this?

    So what if the U.K. pensioners had money invested into a company that sold Nazi Germany gas to use in their chambers. Would they be protected by your same logic as well?

  4. 4
    capstonereport

    Errm, no that isn’t my argument.

    BP should pay the costs. However, BP has more than enough cash flow to cover reasonable claims and expenses. That would include fines.

    Not paying the dividend would be a political gesture. It would be a capitulation to the regime in Washington, and since so many people in UK depend on the dividend, it seems unlikely that the BP board would cave to the intimidation.

    As a shareholder I say do what is right. If that means the company needs to suspend the dividend, then I’ll support that. However, I won’t support doing it just to please the powers in Washington.

  5. 5
    capstonereport

    The WSJ (link: http://online.wsj.com/article/SB10001424052748704575304575296901987387356.html?mod=WSJ_WSJ_US_News_3 ) has some of the numbers and a great point:

    “The consensus estimate for BP’s operating cash flow this year is $34 billion. Capital expenditure and acquisitions swallow $28 billion and dividends another $10.5 billion, leaving a deficit of $4.5 billion. Even then, year-end net debt would be about $31 billion, equating to 22% of total capitalization.

    “BP’s target “gearing” ratio is up to 30%, implying extra debt capacity of about $17 billion. That is about the same as the top end of the first year’s pretax cleanup costs estimated in the Credit Suisse report cited in the congressional letter. So BP can likely handle the costs without touching dividends.” …

    “Politicians have a right to be angry, but trying to set BP’s dividend policy looks both unnecessary and possibly counterproductive. BP, in turn, must ask itself what it would gain by giving ground on this score. In today’s heated climate, it isn’t clear a purely symbolic cut would buy much in the way of political benefit. Indeed, it might merely encourage demands for more.”

  6. 6
    Art Mann

    Obama is messing up. What right does he have to stop the dividend? It is an attack of the very essence and values that built the United States. The freedom of Capitalism. Who is Obama to stop that dividend? Is he God? Do we live in a communist nation? It was an accident for crying out loud! BP is going to fix it and clean it. Tony said he was deeply sorry and he is. I want to see what Exxon would say if the Spanish government would tell them to stop a dividend..Be patient. If Obama stops that Dividend I will never trade a U.S. listed stock. Too much government intervention. That is never good for investors or for an economy. Obama if you do that, investors are gonna flee the US economy. Things are already messed up, dont mess them up more.

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