Should BP Fold and Suspend Dividend Payments to Shareholders?

by Darwin on June 3, 2010

There is a growing chorus of angry groups calling on BP to suspend its dividend payments to shareholders until this whole matter is settled and all parties affected are made whole, however that is ultimately determined.  As any cause that has a tinge of populist support, politicians jump on the bandwagon.  So, now various members of Congress are calling for BP to suspend its dividend.  There are a few schools of thought here and I’m interested in where you stand.

Why BP Should Suspend Its Dividend

  • There’s Going to be a Very Big Bill – The total tally for this disaster ranges from anywhere from a few Billion dollars to over 30 Billion dollars over multiple years.  It’s very early in the game and these numbers could easily increase dramatically.  What if there are multiple health claims to be paid to workers involved in the cleanup?  What if the underwater plumes that are so poorly understood now turn out to linger for decades and destroy even more wildlife and beaches?  What if the leak can’t be stopped?  Many feel that every dime should be preserved now to atone for the disaster as viable calculations of claims are determined.
  • It Just Smells Rotten – While fishermen and cleanup workers are inhaling potentially deadly fumes and miles upon miles of beaches and wildlife are destroyed, BP continues to shell out Billions of dollars in dividend payments each quarter?  Regardless of the financial viability of the company, it just smells rotten.  While not totally related, it’s akin to the banks that received TARP funds cutting their dividends previously and only reinstating them once the dust settled.  Some feel that BP should only reinstate its dividend once it’s clear that all remediative activities have been accounted for and all claimants have been paid.

Why Congress Should Butt Out of BP’s Dividend Payment Practices

  • Congress Should Butt out – Congress should not be involved.  BP will ultimately be held liable for all viable claims and will pay accordingly.  What happens to their dividend between now and then is really no business of theirs.  The company is on sound financial ground, has a relatively low debt load and this artificial intervention could actually cause panic and further declines in shares if investors view a dividend cut as a true sign of concerns over financial solvency.
  • Shareholders Have Been Punished Enough – As noted above, investors took on the risk commensurate with buying a single issue, in this case, BP, but they should not be subject to governmental intervention and manipulation of share prices.
  • Law of Unintended Consequences – As a friend of mine over at Money Energy so eloquently pointed out, further declines in BP’s share price will have a ripple effect on the broader economy as a whole, especially in Europe where there are substantial holdings in pensions and other coffers tied to BP.  On one hand, one could say, “Well, that’s business and perhaps all their eggs shouldn’t have been in one basket”.  On the other hand though, artificial intervention from the US in BP’s dividend practices is inappropriate (aside from whatever legal proceedings will cost for years to come).

The Reality of BP’s Dividend

Ultimately, I don’t believe any entity can “force” BP to cut its dividend.  If anything, they may be shamed into doing so and to try and help preserve what little public image they have remaining, perhaps they’ll do so.  But at this point, it doesn’t appear as though this disaster will drive BP into insolvency and force liquidation later where plaintiffs could have used the money being paid out this quarter.  I think if they do ultimately cut their dividend, the stock will take a bit of a haircut because the rich dividend is the only reason many investors are in the stock now, but I don’t think BP will ultimately need the money, even if the bill hits tens of billions over the next decade.  Their cash flow and revenues from oil are just too great for this to wipe out the company unless this thing goes worse by a full order of magnitude.

What Are Your Thoughts?

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Weekend Reading: It’s Official – BP has the Worst CEO in the World
June 5, 2010 at 10:05 am


1 Bucksome Boomer June 3, 2010 at 11:43 pm

No, Congress shouldn’t worry about whether or not BP suspends dividend payments to shareholders.

They should worry about the long term effects of the spill on our waters, coastline and related businesses. They should worry about how to ensure this doesn’t happen again. They should worry about getting the current leak fixed.

But those are hard problems so it’s easier to grandstand about dividends.

2 Mark Wolfinger June 3, 2010 at 11:48 pm

There is the fact that BP lied when declaring they they had the ability to handle a disaster this size, and even one 10 x worse. Shouldn’t there be consequences?

Even if every person is made financially whole, that’s just not good enough. A way of life is injured, possibly destroyed forever. How do you put a value on that?

Wildlife is put to death in a most painful unpleasant manner. How do you put a price on that? Shouldn’t there be consequences?

One reason BP was able to comfortably tell untruths is that there are never any severe consequences for bad behavior. The banks represent a perfect example. For them, it’s back to business as usual. For the taxpayer, it’s still a disaster.

Someone must pay – or no one will ever tell the truth. If BP gets away with a monetary fine and then goes back to earning billions annually, there is just no incentive for anyone to go through the expense of being prepared for these disasters.

I’d like to see this company forced to pay all claims and turn themselves into an environmental company – forced to spend the next 50 years (minimum) on sustaining the environment in the Gulf region. I’d also ban them from drilling for oil anywhere in the US coastal waters.

People who committed perjury must pay with jail time.

Dividends? yes, I’d demand – not legislate – just demand that BP demonstrate good will and voluntarily suspend dividends for at least 10 years.

Shareholders took a risk. They lost. Too bad.

3 Finacial Uproar June 4, 2010 at 12:38 am

If I was on the board of BP, I would advocate eliminating the dividend- for now. There is simply too much uncertainty right now and during periods of uncertainty, a prudent move is to shore up the balance sheet.

I think the much more interesting question is where should I buy BP’s shares. I’m not going to rush out and buy them next week or anything, but at some point in the future they may represent some compelling value. Of course, we’ll have to wait and see how this whole mess plays out.

I bet Mark Wolfinger doesn’t care for me thinking of BP as a potential value play 🙂

Mark Wolfinger Reply:

@Finacial Uproar,
I’ve always questioned the idea of divesting stocks of unethical companies. Someone has to own the shares, and the company never cares about the identity of its small shareholders.

If someone were to own a small quantity of shares, I don’t see how that would violate any ethical standards. But I’ll pass on this opportunity.

I agree that it will be a value play.

4 ParatrooperJJ June 4, 2010 at 12:22 pm

Most of the cleanup workers are independent contractors. BP has no legal obligation to cover any of their medical bills. BP’s total liabilities are capped at 75 million for damages. The oil rig didn’t even belong to BP, it belonged to Transocean whose liability is going to be capped at around 21 million. While BP is on the hook for the cleanup costs, that will most likely not empty BP’s cash reserves, currently around 7 billion.

5 Martin June 4, 2010 at 12:48 pm

BP’s sole reason for existing at this point is to clean thier mess. This is what you get with this model of economy. Corner cutting.
I’d say thier dividends should be a dead oil covered birds.

6 Budgeting in the Fun Stuff June 4, 2010 at 2:43 pm

I live in Houston, TX about an hour and a half from Galveston. I don’t care about BP’s dividends or no dividends or any of that stuff. I want to stop seeing dead dolphin, sea turtle, and pelican pictures. BP is shoveling money at this thing for the cleanup and attempts at stopping the flow…it should occur to them naturally to cut the dividends so they’ll be able to afford the multi-billion dollar clean-up. I think Congress should butt out unless they have some way of helping right now. I just want the gusher to stop and for the cleanup to happen…worry about monetary consequences later.

7 jim June 4, 2010 at 2:44 pm

BP (and the other companies involved) should certainly be made to pay the bill in full with punitive fines on top of that. I mean the full bill. And then we need to change the laws to make sure this crap doesn’t happen again or if it does the companies responsible face large financial penalties and criminal charges.

Given BP’s balance sheet I don’t think suspending dividends is necessary. BP has tons of cash and assets. They can probably write a $30B check to pay the bill tomorrow if they really had to. Even if they didn’t have cash on hand or couldn’t get it easily then they could pay it out of profits over a few years. BP’s been running $20B annual profits and paying out about $10B in dividends. That leaves net $10B in profits pocketed annually that is easily more than enough to cover the bill in the next year or two.

IF BP’s assets and cash flow weren’t as healthy then it might make sense to force them to cut dividends. If they were losing money quarterly or had little assets then it wouldn’t make sense for them to be paying out money to shareholders while a giant bill to cover the cost of cleanup was unfunded.

8 Earn Cash Now June 11, 2010 at 5:24 pm

BP has so much money that they won’t need to cut their dividend. Investors are scared and don’t want to be part of this mess, and in order to keep the investors they will have to keep the dividend the same. Nobody wants a dying stock and a low dividend.

9 Dave June 17, 2010 at 8:21 pm

Ok, we BP shareholders should probably bite the bullet and forgo the 2010 dividend. But the BP upper management should also show some sacrifice along
with that of the ‘little people’ shareholders and forgo THEIR pay and bonuses for the year and probably beyond. They can certainly afford to live on what they have already amassed.

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