Bailout

How BP will announce its dividend suspension

By Felix Salmon

The WSJ is running a poll asking whether its readers think BP will suspend its dividend; so far, with 2,342 votes, the results are almost exactly 50-50. But I think that Peston is right on this one and that the WSJ’s readers are a bit behind the curve: the dividend suspension is not a question of whether, but when.

The timetable works like this: tomorrow there’s a phone call between David Cameron and Barack Obama, in which BP will be discussed. They won’t have a lot in the way of substantive disagreements: they’ll both agree that BP should pay all legitimate damages arising from the spill. The only difference between them will be rhetorical: Obama will continue to bash BP, while Cameron will either personally or through his finance minister continue to make noises about how important the company is to the UK economy.

On Monday, the board of directors of BP will meet and will decide to delay the company’s second-quarter dividend, currently due to be announced at the end of July, “until the crisis can be brought under control”, in the words of Robin Pagnamenta. That’s likely to be a while, and we can probably expect the same suspension to apply to the third-quarter dividend, as well.

There won’t be any official announcement on Monday, though: first of all comes the big meeting in Washington between Obama, Tony Hayward, and BP chairman Carl-Henric Svanberg. Svanberg and Hayward will try to persuade Obama to lay off the BP-bashing, on the grounds that if he drives the company into bankruptcy, there won’t be anybody left to pay for the spill. Obama will be unconvinced, but will at least be happy to get credit for persuading BP to suspend its dividend payment.

So after the meeting, BP will announce that it’s in full agreement with the Obama administration that it should start saving up money now for any future liabilities, rather than making cash payments to shareholders while those liabilities are still very much up in the air. That might give it a few brownie points with the administration and the public — not a lot, but at least it will be seen as a move in the right direction.

The losers here will be anybody who’s reliant on BP dividends for income, like my commenter jimko for instance. But that’s the nature of dividends: they’re unpredictable, and they certainly can’t be relied upon in a crisis. Some stocks are safer than others, but there’s no such thing as a truly safe stock. As BP’s owners are now finding out. As ever, when politics clashes with economics, politics wins.

Full post as published by Macroprudential on June 11, 2010 (boomark / email).