WEDNESDAY JUNE 9, 2010

Cutting BP's Dividend?

Yesterday, several enlightened politicians called for British Petroleum to cut its dividend in order to pay for the "mess" in the Gulf.  BP officials have been clear that they intend to pay for the clean up of the Gulf, as they should.  But why would any politician care how they fund that payment?

The rough estimate of the cost of the spill thus far is $1.25 billion.  There is no doubt that the ultimate cost will be significantly more and will be paid over many years.  However, BP currently has over $7 billion is cash on its balance sheet and is projected to generate over $7 billion in free cash flow this year.  This would suggest that company has the ability to "pay for the mess", at least in the near term.  So why would the politicians call for a dividend cut?

In my opinion, this is political grandstanding at its worst, an effort to create the appearance that BP's shareholder's "feel the pain."   But haven't BP shareholders already experienced pain?  BP's share price has already dropped from $60 to $34.  A 43% decline.  That's painful if you ask me!  In addition, many investors rely on the BP dividend income.  Cutting the dividend will not "plug the hole" any faster and would certainly hurt those relying on the dividend for income.  If anything, cutting the dividend would encourage investors who hold the shares for the attractive dividend to sell, putting further pressure on share prices.  This in turn, would weaken BP's ability to "pay for the mess" in the long run.  How is that a good thing?   

For investors, the long-term viability of BP is highly uncertain.  There is simply no way to know what the ultimate cost of this disaster will be.  In the short-term, the company appears to have the resources to manage this process.  Perhaps, eliminating or cutting the dividend may ultimately be necessary.  There is no question that BP should pay for the clean-up.  How they finance that payment should be the decision of the Board of BP, not be some grandstanding politician! 

POSTED AT 1899-12-30 09:13:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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