Cutting BP’s dividend would improve its image
Should BP Plc (LON:BP) suspend its dividend payments because of the oil spillage in the Gulf of Mexico? The company does not need to save cash, but it does need to save its reputation and making shareholders seem to suffer might just help.
The UK-based company is in trouble. The explosion at the Deepwater Horizon rig may have seemed initially like one of those unfortunate irritations that afflict an oil industry working in difficult conditions at the edge of technology but it has serious financial consequences.
The £40bn fall in BP’s stockmarket value merely reflect those consequences. The explosion killed 11 men. It may cost $20bn in clean up and compensation. It has upset environmentalists (well honed from past flashpoints such as the Exxon Valdez and Brent Spar) who have converted their dislike of Big Oil into the more acceptable defence of distressed wildlife. And it has provoked confrontation with the US government.
President Obama, nevermind the more maverick senators, may be posturing, but a fight with a foreign oil company – one which already blemished its safety track record in Texas – is an easy battle and the US administration holds all the cards. Even when BP has paid the inevitable fines it will not be top of the lists to win new US business. Some in Washington are talking of seizing BP’s assets.
So future profits will be hit. And it is still possible heads will have to roll, weakening management too.
That said, even a £120bn oil company shrunk to £80bn is big and BP has the cashflow to pay all the bills from this disaster. So a cut or freeze in the dividend would not be to make shareholders suffer some of the pain alongside other stakeholders – the fall in the share price has already hurt them and an increased payment would help offset the damage – but it is important BP looks like its concern is stemming the leak and cleaning the coast, not with helping investors.
To describe the situation as a public relations disaster is to underestimate the problem. However, BP has presumably looked at the PR aspects, pulling corporate advertising and banning any activity that suggests its sole objective is not solving the leak. That starts with a low profile on the cocktail party circuit and absence from corporate events such as the Derby or Chelsea Flower Show. It will mess up many managers summer holidays too.
But there is no point ruining the pious picture with a big rise in the return to investors. And shareholders do not lose the dividend: it remains in the company and will no doubt be paid out later when the furore has died down. A cut or freeze would be bowing to external pressure when the board should be in control and financial measures ought to be separate to operational issues, but BP is in such trouble it is no longer setting its own agenda.
June 3rd, 2010 at 7:12 pm
I just want to wish BP staff the best of luck with their trying to stem the oil leak. It was an accident and I feel sure you are doing your absolute best to fix the problem. You should be getting support from the americans not just continuous criticism. Good luck to you all, from John G ( a 72 year old scouser),
June 10th, 2010 at 1:29 pm
With all the talk of Obabma insisting that BP does not make any dividend payments I’m left wondering if he is going to insist the same for Transocean and Haliburton.
But they’re American companies so I’m probably kidding myself.
Equally I’m bemused by the latest statements about making BP pay for the costs of other drilling companies that are losing because of the US government’s moratorium.
As America now apparently hates oil companies so much, maybe it’s time they stopped using oil.
June 12th, 2010 at 9:08 pm
I, along with most other people in the US, now realize that many British pensioners get a lot of their cost flow from BP dividends. Many of us own mutual funds heavily invested in BP, and we are on the losing end, too. It was not our intention to deprive retired folks of their income. The US congress was responding to the economic hurt that has deprived hundreds of thousands of folks along the Gulf, and their suppliers and customers, of income, too. Many of them have very shallow pockets, too.
Our quarrel is not with the wonderful British peeps, but with a corporation that has placed profit before basic safety. Anyone in the UK see the 60-Minutes program with the rig survivors who told the story about BP’s decisions leading to the rig explosion? (I’m pretty sure it’s available online at cbs.) It’s an eye-opener, unless you’re not interested in versions other than BP’s.