Should BP Fold and Suspend Dividend Payments to Shareholders?

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? ©2010 Darwin's Finance . All Rights Reserved. . Related posts: The Cost of Revenge is Staggering: A Tale of Divorce and Financial Ruin Mortgage Rates Dip Below Key 5% Level – How to Get Yours Even Lower No Good Deed Goes Unpunished – Charitable Giving Does Switching Wall Street Compensation to Stock Really Decrease Risk-Taking? Will the ETF be Viewed as Another Financial Innovation Disaster?

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Should BP Fold and Suspend Dividend Payments to Shareholders?