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Corporate Governance

: The Race to the Bottom

BP, the Dividend and the Board (Part 2)

By J Robert Brown Jr.

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The Company has a long history of paying dividends, having done so on "ordinary shares in each year since 1917."  Moreover, BP has committed to continued payment of dividends.  See Form 20-F, March 3, 2010, at 94 ("In 2000 and thereafter, dividends were, and are expected to continue to be, paid quarterly in March, June, September and December."). 

BP has stated that its policy with respect to dividends is to "return to shareholders all free cash flow in excess of investment needs, all other things being appropriate. This has typically been done through a mixture of dividends and buybacks."

In 2008 and 2009, BP paid a dividend of around $10 billion.  As the Company's Form 10-F noted:

  • Dividends and other distributions to shareholders The total dividend paid to BP shareholders in 2009 was $10,483 million, compared with $10,342 million for 2008. The dividend paid per share was 56 cents, an increase of 2% compared with 2008. In sterling terms, the dividend increased 24% due to the strengthening of the dollar relative to sterling. We determine the dividend in US dollars, the economic currency of BP.
The Company announces dividends four times a year.  During the period of the oil spill (the explosion at the platform was reported on April 20), the Company has already announced one dividend ($0.14/share), to be paid on June 21.  See Form 6-K, Report of Foreign Issuer, April 27, 2010 ("BP today announced a dividend of 14 cents per ordinary share to be paid in June.  The corresponding amount in sterling will be announced on 8 June 2010, and calculated from the average of the market exchange rates for the four dealing days commencing on 2 June 2010.  Holders of American Depositary Shares (ADSs) will receive $0.84 per ADS. The dividend is payable on 21 June 2010 to shareholders and ADS holders on the register on 7 May 2010.").  The next is slated for July 27.

 

It is this $10 billion or so of payouts that has attracted the attention of the Administration. With the costs mounting from the oil spill, the cash otherwise paid as a dividend might be needed to pay off some of the cleanup costs.  In addition, it amounts to available cash that can be used to pay off those in the Gulf already seeking compensation for the consequence of the spill (fishermen, oil workers, business owners).  In response to the pressure, reports indicate that the Board is considering a change in dividend policy. According to the NYT: 
  • A person with direct knowledge of the board's discussions said on Monday that the board was considering three possible options: suspending payment of the dividend for two quarters, paying the dividend in bonus shares rather than cash, or placing an amount equal to the dividend payment in escrow while continuing to pay for the cleanup separately. Under the last option, BP would not tap the escrow fund unless the cost of cleanup work and claims exceeded what it could pay out of its regular cash flow. This option, the person said, could offer some reassurance to both Washington and to shareholders that BP will meet its financial obligations to both.
Will they change the dividend?  Probably but not necessarily for the reasons most are suggesting.  We'll explore that in the next post.

Full post as published by The Race to the Bottom on June 16, 2010 (boomark / email).

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