Democrats Aim at BP and Instead Hit Retirees
By Jeremy Weltmer
Friday, June 11, 2010 11:46 am
In recent weeks, fiscally ignorant Senators and Congressmen have been trying to put the thumbscrews to BP and nix its dividend until some indeterminate point in the future. Congressman Welch and 40 of his colleagues wrote in a letter
“as BP presides over one of the greatest environmental and economic catastrophes of our time, we find it troubling that your company plans to divert financial resources to shareholder dividends and slick marketing campaigns….We urge you to halt your planned dividend payout and cancel your advertising campaign until you have done the hard work of capping the well, cleaning up the Gulf Coast and making whole those whose very livelihoods are threatened by this catastrophe. Not a moment before then should you return to business as usual.”
Senators Schumer and Wyden wrote
“find it unfathomable that BP would pay out a dividend to shareholders before the total cost of BP’s oil spill clean-up is estimated. The total cost of the clean-up estimates could reach $37 billion if the well leaks until relief drilling is completed in August, according to Credit Suisse Group AG. While we understand the need to reassure shareholders that the disaster in the Gulf will not substantially impact BP’s long term financial health, we are concerned that such action to move money off of the company’s books and into investors pockets will make it much more difficult to repay the U.S. government and American communities that are working around the clock to stem the damage caused by this devastating oil spill. We urge you to reconsider your dividend pledge until accurate costs of clean-up and liability claims can be estimated. We are certainly not opposed to BP paying dividends after the well is capped, clean-up has been completed, and the victims have been justly compensated.”
Perhaps even more worryingly, the Wall Street Journal reported
that “a Justice Department official told Dow Jones Newswires on condition of anonymity Thursday that the agency has no plans to seek an injunction that would block BP from paying dividends, but hasn't ruled out that option at some future time.” As high-minded as this rhetoric may sound, it both belies the facts of BP’s finances and ignores the ramifications of not paying a dividend.
In recent weeks, BP’s shares in London and in depository in the US have been in a freefall that does not correlate with the company’s remaining assets or cash flow. Fadel Gheit, an analyst at Oppenheimer & Co, stated
that “we estimate that BP shares currently discount $60 billion in potential liabilities, which we think is very unrealistic.” BP’s finances speak for themselves
“Following Tuesday's letter signed by 31 members of Congress calling for BP to suspend dividends, the company's stock, yielding 11%, now appears priced for a deep cut. Yet there are good reasons why BP should resist these demands, at least for now. The consensus estimate for BP's operating cash flow this year is $34 billion. Capital expenditure and acquisitions swallow $28 billion and dividends another $10.5 billion, leaving a deficit of $4.5 billion. Even then, year-end net debt would be about $31 billion, equating to 22% of total capitalization. BP's target "gearing" ratio is up to 30%, implying extra debt capacity of about $17 billion. That is about the same as the top end of the first year's pretax cleanup costs estimated in the Credit Suisse report cited in the congressional letter. So BP can likely handle the costs without touching dividends.”
Provided that the relief well in August does not fail, BP can meet its obligations both to its shareholders and to those affected by the spill.
Moreover, the composition of BP’s shareholder base makes a dividend cut even more worrying. Looking at the top shareholders for BP, both the number two and number three shareholders are pension fund investment units Legal & General Group, the U.K. insurer and money manager, and Norges Bank Investment Management, the Norwegian state sovereign fund. Moreover, as BusinessWeek reports
, of the 31% of the company’s market capitalization in the UK, the vast majority is held by pensioners or pension funds trying to reap its 11.51% dividend yield. Indeed, last year, BP made up 14% of total shareholder payouts
on the London-based FTSE 100 stock index.
Radically slashing BP’s dividend as a symbolic and populist gesture would do much more to harm retirees who hold a dividend-concentrated portfolio as a way to augment government pensions or retirement programs than anything else, especially when the company can afford to meet both its obligations in the Gulf and to its shareholders. Perhaps this explains why Chancellor of the Exchequer George Osborne told The Wall Street Journal
that it is “important to remember the economic value BP brings to people in Britain and America” in a typically British understatement.