BP WATCH: BP's Cut To Declared 1Q Dividend Marks Unusual Move

17th Jun 2010 20:21

By Donna Kardos Yesalavich and Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC's (BP) decision not to pay a first-quarter dividend it had already declared has upset some investors. Typically, once a company says it will pay a dividend to holders as of a certain date, investors consider that dividend a given and factor the income into their investment decisions. When BP released its first-quarter results on April 27, just seven days after the explosion of the Deepwater Horizon rig that killed 11 and led to the oil spill, the company said it would pay a dividend of 14 cents a share, or 84 cents an American depositary share, on June 21 to shareholders of record on May 7. In turn, even those shareholders who sold the stock after May 7 were assuming they would still get the first-quarter dividend. It's unusual for a company to retract a promise to pay a dividend, especially less than a week before that dividend was expected to be paid. "It's discouraging and obviously it would have been nice to receive that because it is a very high dividend," said Daniel Morgan, portfolio manager of Synovus Securities. Synovus had some BP shares in a portfolio for its dividend income until last week, when the firm eliminated the position as the outlook for the dividend dimmed. Still, Morgan said he understood BP's decision in cutting it. "This is an unprecedented issue," he noted, adding that he realizes it is important for BP to be "acting like they're making all efforts possible to deal with this." David Chalupnik, head of equities at First American Funds, also said the move was disappointing but not something he was particularly surprised or angry about, noting that the decision has "come down to such a political thing." First American Funds cut its position in BP stock in half last week as the dividend looked less certain, and after the Wednesday announcement about the dividend cut, "we will not be holding the stock going forward," Chalupnik said. "We do find the stock to be extremely cheap, but there's just a ton of risk and liability around it," Chalupnik added. "The reason we bought it to begin with was for the dividend, so with that dividend gone for 2010, it makes it difficult for us to hold on to the stock." In the options market, traders said investors who hold BP put contracts granting the right to sell shares suffered a small hit from the dividend cut, since the bearish contracts had previously priced in a payout to investors that now won't need to be made. Bearish BP investors usually have a choice between buying a put and shorting a stock. Unlike a short-stock position, a put holder isn't required to pay a dividend-bearing stock's payout. Take that benefit away and, all else being equal, BP puts are less attractive. Conversely, the holders of bullish call options would likely have seen a small benefit from the dividend cancellation, since the removal of the payout makes a bullish long-stock position less attractive relative to the much cheaper call. Traders stressed both impacts would be minor, since dividends are just one element that enter into the options-pricing equation. In addition, investors had already been expecting a dividend cut and started pricing in such a cut, if not an outright cancellation, in recent weeks. A much bigger factor in BP options pricing the last few weeks is implied volatility--the forecast of how volatile investors think a stock might be. Such expectations "have a much greater impact than this dividend news" on the pricing of BP options, according to Randy Frederick, director of trading and derivatives at Charles Schwab. Some investors have wondered whether there could be legal implications for a company not paying a dividend it had already declared. However, Steven Toll, managing partner of Cohen Milstein Sellers and Toll and co-chair of the law firm's securities-fraud practice, said it was unlikely that any lawsuits in that regard would succeed. "It's very hard for me to see a shareholder bringing a valid lawsuit to compel them to pay a dividend," Toll said. "I don't know if that will lead to any actions." However, Toll said his firm has been talking to a number of large institutional investors who are considering lawsuits about whether BP disclosed enough about the severity of the oil spill early on. "This is going to be a big deal," he said. "The damages are enormous to stockholders in the drop in the stock price that has occurred" since the April 20 explosion of the Deepwater Horizon rig. BP's American depositary shares were down 1% to $31.50 in recent trading, which puts the stock's drop since the April 20 explosion at nearly 49%. -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 17, 2010 15:21 ET (19:21 GMT)