by David Berman
Investors hate uncertainty, and BP PLC (BP) is about as uncertain as you can get in the investing world. As a result, the shares are shunned – but is there an opportunity amid this wreckage?
The recent discussion of the company’s dividend is one reason to feel a slight bullish twinge. You would think that with the massive cleanup costs and litigation bills facing BP, the company’s dividend would be the last thing investors would care about right now.
But there it is, upheld as another source of uncertainty and one more reason to avoid investing in BP as it struggles to contain a disastrous oil spill into the Gulf of Mexico. If the embattled company suspends the dividend, the thinking goes, the shares will fall even further because big pension funds will dump their holdings.
Let’s take a step back here, though. The dividend is an interesting way to approach this stock if you, like a million other investors, are wondering if BP’s beaten-up share price now reflects more damage than the company is likely to sustain in the months ahead.
The company pays out a dividend of $3.36 (U.S.) a share for the American Depositary Receipts that trade on the New York Stock Exchange. That gives the shares a tantalizing yield of 9 per cent, if you think the dividend has a chance of surviving.
BP is already sounding a bit cagey on its future. The recent statement from BP’s chairman – “Future decisions on the quarterly dividend will be made by the board, as they always have been, on the basis of the circumstances at the time” – sounds less than encouraging.
But whether the company cuts the dividend or not, there seems to be an opportunity here. Since the Deepwater Horizon oil drilling platform exploded and sank in April, the company’s shares have fallen nearly 40 per cent, shaving about $70-billion from the company’s market capitalization.
The company paid out more than $10-billion worth of dividends last year. If it suspends that dividend, and the share price remains the same, then the total damage associated with the deepwater disaster (including the loss of market capitalization) comes to about $80-billion in the first year of a dividend cut. More if the shares fall further, of course.
Is that a realistic damage scenario? Any estimate of cleanup costs at this point is suspect, largely because the well continues to spew oil and there are so many variables involved. But it is likely that the market is overestimating the damage, simply because investors have a tendency to get overly fearful during uncertain times.
And if BP doesn’t suspend the dividend – or, say, merely reduces it – then it signals that the oil spill in the Gulf of Mexico might not be the financial disaster that investors fear.