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Is BP in Danger of a Dividend Cut?

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BP (NYSE: BP  ) continues to face a host of legal problems, despite it being nearly three and a half years since the Deepwater Horizon oil spill. Its two biggest pending issues are the business economic loss claims settlement and the fines for violation of the Clean Water Act. Some estimates for the business claims top $16 billion. Additionally, US authorities are aiming for $18 billion in fines for violation of The Clean Water Act. Then there's another $34 billion on top of that individual states are suing for. Investors seem to have completely dismissed these as a problem.

BP's stock has stayed range-bound from $40 to $45 over the last year, similar to the channels ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  )  have been stuck in.

Dividends and book value tell another story
BP, ExxonMobil, and Chevron all trade with similar forward estimated PEs of 9-10. All three have raised their dividends per share by around 30% over the last two years. According to the numbers, all three companies and valuations appear to be similar with two exceptions: dividend yield and price-to-book value.

BP has a 5.1% dividend yield compared to around 3% for its two larger peers. It also trades just a tad over book value while Exxon trades at around 130% higher than book value and Chevron around 70%.

Is BP writing checks it can't cash?
BP's dividend yield is simply unusually high. If the market was as confident in BP's dividend as it is in Exxon or Chevron's dividend, it too would have around a 3% yield and trade around $72 per share. Instead it's closer to $42 per share. Perhaps the market really does know best.

If you reduce BP's shareholder equity by the potential of $16 billion (for the settlement) plus $18 billion (for the Clean Water Act fines) and $34 billion for the suits by the individual states,then BP trades around double its book value, more in line with its peers. Up to $68 billion is a serious chunk of change even for BP. That would bring BP's yield down to 2.8%, also more in line to its peers.

The bigger risk
BP has continuously under-budgeted its legal problems so I wouldn't be surprised if the market is wrong and the dividend takes at least a bit of a cut. . In 2010 it took a $40.9 billion charge, cut the dividend entirely, and sold $30 billion in assets. While I certainly am not expecting the entire dividend to be cut, it does appear that BP is being too optimistic with its current dividend policy. Given that risk, I believe Exxon and Chevron are the safer and yet better bets over the next five years. The Foolish bottom line is all three have similar earnings power versus their stock prices currently, but Exxon and Chevron comes with a dividend that you can rely on. Exxon and Chevron each have long histories over 10 years of continuous dividend payouts that only increase. BP has cut its dividend before, and it's certainly possible it could do so again.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2013, at 9:58 PM, sgorman568 wrote:

    The author of this article is pulling some of the numbers out of thin air. The initial amount of cash set aside by BP was $20 billion. Other installments have been set aside, and most of what the lawsuits require, including by the US government, have already been paid. The majority of the monies to individuals and businesses have already peen paid and suits have been closed. Lets also understand that several billion of the monies to be paid have been and will be paid by other companies connected to the leak. All of the companies that have been charged with payments have already set aside more than they will ever pay out. Also, the payments are being made over time, not all at once. There should be no reason to worry about a dividend cut by any of the players.

  • Report this Comment On September 29, 2013, at 10:01 PM, sgorman568 wrote:

    One other foot note, BP is trading at about 5 times earnings, not 9-10 like it's peers. There is plenty of room for payouts to lawsuits, growth, and holding or increasing the dividend.

  • Report this Comment On September 29, 2013, at 11:23 PM, nickeyfriedman wrote:

    The $20 billion trust fund has already been depleted according to BP. The Clean Water Act fines haven't been accounted for, the states suits, and settlement are all figures unaccounted for still.

  • Report this Comment On September 29, 2013, at 11:26 PM, nickeyfriedman wrote:

    BP's forward PE is not 5 times earnings.

  • Report this Comment On September 30, 2013, at 12:14 AM, joshm1 wrote:

    BP's dividend yield is high compared to Chevron and Exxon because BP's price is nowhere near an all time high. Exxon and Chevron trade near their all time highs. If BP was trading at $70, near its all time high, the yield would be 3%. So BP is not paying out too much in dividend. In fact it is lower than before the Gulf disaster.

    As commented before, many other parties have major exposure and liability to this situation than just BP. The liability the author lays out for BP is extremely unlikely.

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