HEARD ON THE STREET: BP Dividend Debate Reminder Of Payout Uncertainty

11th Jun 2010 19:39

By David Reilly A DOW JONES COLUMN Dividends aren't sacrosanct. Just don't tell that to many investors, especially holders of BP's stock. As shown by the heated debate over BP's dividend -- sparked by U.S. political pressure for the oil giant to hold off on payments due to the Deepwater Horizon disaster--companies often face a furious reaction from shareholders if they have to contemplate the possibility of a payout cut. In some ways this is understandable. Many investors purchase a stock for its yield. If that looks likely to change, they sell. Investors also fear that once a dividend disappears, it will never return. In BP's case, there may be an additional worry: While the company faces uncertain liabilities, the more cash it retains the bigger a target it may become. But shareholders need to keep in mind that dividend payments are not as inviolate as interest payments on bonds. To hammer that point home, companies should get shareholders used to the idea that payouts can fluctuate and pursue more flexible dividend programs. This may cushion the market blow when problems arise. Companies should say: "Sometimes we'll have excess capital and give it back to you, sometimes we won't," says Harry DeAngelo, a professor at the University of Southern California who has studied corporate payout policies. To do so, he adds, companies need to build more trust with shareholders over dividends. "If managers did a better job being strongly committed to delivering cash on a regular basis to investors, when they get in the soup they're going to have more credibility when they tell investors we're not doing this but we'll be back as soon as we can." Too often, though, companies drag their heels. The credit crunch showed how dangerous hesitation can be for financial firms in particular, which can use dividend cuts to protect or re-build capital buffers. Citigroup, for example, only slowly trimmed its dividend as losses mounted, paying out $10.7 billion in 2007 and $7.5 billion in 2008. The firm was ultimately forced to cut its dividend almost entirely in January 2009, after it required $52 billion in government bailout money. Although the danger facing industrial firms usually is less because they operate with far lower levels of borrowed money, many are similarly reluctant to even discuss the possibility a dividend may not be set in stone. Verizon Communications, for example, has faced questions about its ability to continue funding its dividend. Yet on the company's first-quarter earnings call, Chief Financial Officer John Killian staunchly defended the payout, saying it is "very safe" and that "making sure we have stability and being in a position to recommend to the board dividend increases is highly, highly important to us." Such tough talk often supports shares, at least in the short term. But as BP shows, hard-and-fast investor expectations about dividends can leave companies in a tight spot. (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 11, 2010 14:39 ET (18:39 GMT)