Dividend Has Transocean In A Tough Spot

Todd Shriber
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When a company pays a dividend, that is usually a positive sign and an event that usually does not result in a huge decline for the company's stock. The operative word in that sentence is ''usually.'' Yes, there have been times that companies paid dividends when the market knew the balance sheet was suspect and there have been companies that have transitioned to stock dividends from cash dividends, raising suspicion that the underlying financials were weak. These are scenarios where a dividend payment is not a good thing.

The situation surrounding Transocean's recently approved $1 billion dividend is entirely different and very well could have the world's largest provider of offshore drilling services between a rock and a hard place. The media and the political chattering class have seized on Transocean's approval of the dividend as an opportunity to tarnish the company in the court of public opinion, not that much help has been needed on that front following the April 20 Deepwater Horizon rig explosion that left 11 dead. Remember, the rig was owned by Transocean, not BP (BP).

Not surprisingly, the media are over-sensationalizing the dividend. Transocean approved the dividend at a closed-door meeting in Switzerland last week and that has led the media to paint a picture that conjures up images of what one might imagine a meeting of the Illuminati might look like. The reality is Transocean announced the dividend on February 16. It will amount to $3.11 a share annually and represents the company's first regular payout in eight years and its first dividend since a special distribution in 2007.

Back in February, analysts said the dividend may disappoint investors, particularly those expecting Transocean to say it was going to pay $4 a share. Still, something is usually better than nothing and Transocean (RIG) shares traded higher after the news. Fast-forward three months, and this payout has become a thorn in the side of a company that does not have many friends in Washington at the moment.

On Monday, 18 Democratic senators asked U.S. Attorney General to investigate Transocean for moving forward with the dividend, alleging that the company may be using the payout to limit its financial liability for the spill. Just because senators ask for something does not mean they will get it, but let's assume that the Justice Department does proceed with an investigation of Transocean. That would lead to more tough times for shareholders.

The mere specter of the Justice Department looking into the dividend sent Transocean shares down almost 9% on Monday. The stock touched a new 52-week low before rebounding a few cents. Transocean does not have attractive choices here. Its shares are down 40% since the rig explosion, outpacing even BP's 30% loss.

The company could eschew the dividend in an effort to bring some shine to its image, but that would send all the wrong the signals to the investment community and the shares would probably fall further. On the other hand, Transocean could go ahead and pay the dividend and risk a federal investigation and that would of course be a drag on the stock as well.

Neither is an appealing scenario for a company that should not want to ire regulators and enforcement agencies, but cannot afford to rattle shareholders anymore either.