The ever-falling BP share price

By Felix Salmon
June 9, 2010
dividend. The company has been paying out a steady 84 cents per share per quarter, and that payment is now in jeopardy; as recently as last week, it seemed to be safe.

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With its latest stock-price plunge today, BP has broken three important psychological levels: it’s below book value, it’s trading at less than half of its 52-week high, and it’s worth less than $100 billion. The culprit this time around would seem to be the dividend. The company has been paying out a steady 84 cents per share per quarter, and that payment is now in jeopardy; as recently as last week, it seemed to be safe.

How does the retention of $3.36 in annual dividend payments justify a $4.50 fall in the share price? Well, so long as BP holds on to that money and doesn’t transfer it to shareholders, it can be forced to transfer it elsewhere instead — for instance to workers who were laid off from other oil companies upon the introduction of the moratorium on off-shore drilling. BP’s coffers are not at all a safe place to store shareholders’ cash: they can be raided by all manner of legal and regulatory eventualities.

But there’s another dynamic at work here: BP and Shell between them account for 50% of the dividends paid by UK companies every year. It seems quaint, but there really are a lot of far-from-wealthy people in the UK who live off their dividend income, and those people constitute a surprisingly large part of BP’s shareholder base. If BP suspends its dividend, the only way they can get money from their stock is by selling it.

If BP doesn’t suspend its dividend, it would seem to be approaching screaming-buy levels right now: a $3.36 dividend on a stock worth $30.42 is a dividend yield of 11%. Plus of course there’s the possibility of an exit via takeover. But the fact is that the government can and will trump all of those considerations; it’s certainly not going to allow BP to declare an enormous special dividend, sell most of its remaining assets to Exxon, and then plead bankruptcy when the cleanup bill arrives. If such a thing were possible, BP stock would surely be worth a lot more than it is right now. But, thankfully, it’s not.

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Comments
16 comments so far

You sound awfully sure that the U.S. government is going to stick it to big oil. I suspect it will be like the big banks — lots of tough talk, a few regulatory changes, but ultimately the guilty will retire to a life of leisure. I see a breakup of BP with the enviro liabilities stuck off in some subsidiary nobody wants, with most likely the U.S. government getting stuck with it. President Palin will complain a little publicly, but in private all will be hunky dory.

Posted by Setty | Report as abusive

PS – I have no BP shares. Just a lot of doubt about Obama’s desire or capacity to stick it to the man.

Posted by Setty | Report as abusive

I suspect that an end game may include BP selling its US offshore oil exploration and production operations to other majors so that the government can allow drilling to recommence.

Posted by ErnieD | Report as abusive

Remember the Valdez accident, Exxon paid pennies on the dollar after years of legal battles. If BP did not keep making mistakes they could start that process. Not making a clean cut on the riser is just the latest of their blunders and now making noises about not compensating laid off workers will put the pressure on many people to actually make them pay. I pity the Brits who own their stock.

Posted by Potatoe1 | Report as abusive

Why is it that doomsday stories float around all the time, whether it is the stock price or
anything connected to the spill.
Everybody needs to relax and figure this whole process is just going to take time. There will be continuing efforts to collect more oil, and to clean it up. A lot of the oil is degrading by nature anyway.
Come August, it will be plugged and much of this sad story will fall to the way side.
It is just too bad that if only that BOP worked, as it was suppose too, all of this horrible outcome could have been avoided.
The BOP would have stopped the blow out in the first place, and also, closed off the well later on if that portion did not work as designed for some reason.
Yeah, there was drilling mistakes up top, but, as I see it, it was the BOP that is the main culprit here—it should have prevented all of this.

Posted by jopocop | Report as abusive

Hello Obama?

This is David Cameron. David.. You know the PM of Britain.
PRIME MINISTER. YAH. How are you doing? Listen on that BP dividend thing. Listen, and listen carefully. You have your problems and I have mine. Now there are a lot of people depending on their dividens to pay the rent, food, electric bill, you know. And in your country, you have hundreds of pension funds that are counting on that dividend payment to meet their obligation. Now if you cut that dividend. The stock is going to plummet. BP might even go bankrupt. That’s gonna really piss me off. Got that? Now, you know we have troops in Afghanistan right? Well, let me tell you how it’s gonna be old chum!

Posted by RogerUSA | Report as abusive

“BP stock would surely be worth a lot more than it is right now. But, thankfully, it’s not.”

Woah there, Felix! Are you rooting for BP to fail?

Posted by DanHess | Report as abusive

Obama showed what he thought of pensioners and the common working man when he forced GM into bankruptcy and handed the company over to his labor union backers. While Obama has caused immeasurable suffering in the US since taking office, all we’ve heard from the media is how beloved he is in Europe. Though I hate to see retirees lose what they worked their entire lives for, perhaps this will wake Europe out its stupor for this incompetent dope.

Posted by Pug | Report as abusive

The leak is far worse than BP or the US government are admitting. No corporation is big enough to ever pay for a full cleanup of the Gulf of Mexico. BP will be bankrupted in short order, its assets sold off.

Posted by DougJ | Report as abusive

jopocop is right. This is a process that needs time.

It’s seems to me to be pretty hypocritical to hate on big oil when oil is crucial in almost every aspect of our lives. It provides the food in our bellies, it is involved in most of the products that we buy and it gets us around on land and in the air.

Does anyone else find it silly when Obama jets around with his massive entourage, talking about kicking oil-related ass?

Has the Federal government bothered to find and market even one drop of oil?

The number of solutions offered by the Federal government through this fiasco has been and will remain exactly zero. It is much safer not to offer any solutions, because if they don’t work, no skin off your back!

Posted by DanHess | Report as abusive

Enough already about how oil is in everything we consume including food. The evidence is clear, whether it is in the pure form that spills into the environment or through the goods that we consume and then throw away or the food that we eat, oil poisons the earth and the human body and it is a indisputable fact!

So what do we do…continue to poison the environment and ourselves or do we move our countries efforts in decisively moving away from oil by aggressively developing other sources of energy that are more inert to biological systems?

Do we continue to cry like babies when we invest in companies who cut corners and damage the public or environment because we are afraid of how the corporations might respond or how the stock drop might hurt investors?

Is there any wonder why we are in a bear market.

Posted by csodak | Report as abusive

the deleting of dividends from BP is a deletion from every low income person in the usa–every retirement trust has stocks like BP BECAUSE they pay cash and have been a good earner–where bonds and C-D’s pay almost nothing–great –the punishment lands not on the aristocrat super rich greedheads–but on janitors-carpenters-plumbers-service workers—-great idea–the focus should be on just stoping the spill not thinking how much you’re going to make off this disaster–I am a low income senior with heart and kidney problems for whom the medicare cut (21%) are going to pinch–me and hundreds of thousands of others who face death from further cuts in our paltry income–when these hi-income harvard lawyers say “LETS GET THE BASTARDS”–they’re talking about YOU dummy!!

Posted by jimko | Report as abusive

LUV pays a dividend of 0.5 cents per share per quarter; my understanding (though this may be wrong) is that this is so that institutional shareholders with mandates to hold only dividend-paying stocks can own their stock. I think suspension is likely, and that any dividend would face political headwind, but I’d like to raise the possibility that BP will cut the dividend to some token amount, but not to zero. I don’t think that’s the most likely scenario, though.

Posted by dWj | Report as abusive

Er, I put that comment on the wrong post…

Posted by dWj | Report as abusive

Actually, the market has not considered BP’s dividend safe for over a year. BP’s dividend yield 12-18 months ago was in the range of 8-10 percent.

If one used the put-call parity formula for BP stock and option prices with a correction for expected dividends with stock and option prices from that time, the results showed that the market was expecting a dividend cut.

Since BP had more than enough earnings and cashflow to pay dividends at that time, the market was predicting some extraordinary event that would cause BP to reduce its dividend at least as far back as 18 months ago.

Posted by MiltonRecht | Report as abusive

It took 17 years for Exxon to be finally penalised for Valdez. I would consider this the lower estimate for BP.

Why? Well BP has more avenues to fight this than Exxon mainly because the American contractors it got in to do the drilling and well prep were the ones who seemed to have slipped up.

The clean up will actually happend far quicker than people expect

Posted by mourndekai | Report as abusive
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