BP Cuts Dividends by 50%

British based energy giant BP PLC (BP) cut dividends by 50% to 31.50 cents/share for each American Depository Receipt ( minus any ADR fees). This was the first dividend cut for BP since 2010, when it had a costly oil spill in the Gulf of Mexico.

This is the second oil major to cut dividends, after Royal Dutch Shell (RDS.B) cut dividends at the end of April 2020.

The turbulent global economy, the pandemic, and the low energy prices are the reasons for this move.  This move would provide the company with more flexibility and strengthen its balance sheet. They are expecting to focus excess cashflows to share buybacks, which are easier and less newsworthy to scrap when things go sour. When you are not making enough profit to support a high dividend, that was set when the times were better, cutting it may be a logical step.

As is the case for each dividend cut, I automatically sell after the news is posted.

If a company later reinstates its dividend, and starts raising it again, I may reconsider it. I did this for BP in 2013 and 2014, but I don't think it was a wise move in hindsight. The same strategy was not a smart move for General Electric (GE) either. While I may need a few more data points, so far it looks like buying back after a dividend is reinstated may not be a good strategy. On the other hand, buying Pfizer after it cut dividends in 2009 would have worked very well ( I didn't buy it).

The oil and gas sector is unable to earn its dividends from earnings right now, based on low energy prices. As a result, there are few bargains to be found in the space.

The interesting fact is that when BP suspended dividends in June 2010, the stock fell as low at $26.75/share. The company resumed paying a dividend in March 2011, and it has distributed $21.53/share so far. By February 2011, the stock was selling at $46 - $48/share.

It definitely looks like for cyclical companies, the time to buy may be when things are gloomiest, rather than when they are on top of the world. That being said, you have to have a good timing twice- first to buy low and second to sell high. I am not good at timing the market, and I doubt many of you are either. Hence, it makes sense to invest in companies that do ok throughout the ups and downs of the economic cycle. This means that exposure to commodity companies may have to be kept low.

Exxon Mobil (XOM) is probably at a high risk to cut dividends over the foreseeable future, because it has been unable to cover the current distribution out of earnings per share. This is from their latest conference call:

Finally, we have a long history of providing a reliable and growing dividend. A large portion of our shareholder base has come to view that dividend as a source of stability in their income, and we take that very seriously. While we manage our capital allocation priorities over the long term, we also recognize the need to balance in the near term to respond to market conditions. In response to the unprecedented environment that we find ourselves in, we've taken decisive action in 2020.

To recap what we've done so far this year. We've reduced short-term capital spending by more than 30%. We're on pace to reduce cash operating expenses by more than 15%. We've increased debt to a level we feel as appropriate to provide liquidity, given market uncertainties, and we will hold it at that level. And we're continuing to pay a reliable dividend.

While it sounds reassuring, this is usually how management teams try to cheer shareholders up, before a dividend is cut.

To me it is fascinating that the oil crash began in 2014. Yet, we didn't really get the oil and gas majors to cut dividends until it intensified in 2020. Energy investors have lived through a brutal 6 year period of negative returns, which is in stark contrast with the situation in 2014, when energy was touted as the next big thing, valuations looked cheap, and energy was one of the best performing sectors over the preceding decade.

Relevant Articles:

- Is BP’s dividend safe?
- Dividend Growth: The Risk of Being Cocky
- Royal Dutch Shell Cuts Dividends For The First Time Since World War II
- Are Energy Stock Values Today a Once in a Lifetime Opportunity?