Reading The Tea Leaves On BP's Dividend Cut

Todd Shriber
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In what can only considered less than surprising news, embattled oil giant BP announced today that it will not pay a dividend to shareholders this year. Despite the fact that the company recently authorized a payout of 84 cents per American depositary receipt for the first quarter, that dividend will be canceled, as will other payouts for the rest of 2010. BP says it hopes to resume paying a dividend next year, but working on that premise means one has to assume BP will even be in business in 2011 and that is far from a guaranteed proposition.

As is the case with most dividend cuts, there is going to be some pain with BP's dividend suspension and the losers, unfortunately, are easily identified. Earlier this week, I noted in a news story here on OilSlick that BP's dividend accounts for about $1.45 of every $10.20 in dividends paid by U.K.-listed stocks, so there are plenty of investors there, both institutional and retail, that are going to be adversely impacted by today's announcement.

Throw in U.S. investors that had been wooed by BP's dividend and held the shares on the way down and those that thought they were buying value when the yield was pushing 10% on the ADRs and there is no getting around the fact that BP's dividend suspension, while not surprising, is very bad news indeed.

Perhaps in a testament to the market's ability to ''price-in'' bad news when it has fair warning, BP shares actually gained over 1% on a day when the dividend cut was announced and the company promised $20 billion in compensation for victims of the Gulf of Mexico oil spill. A decent day for a stock that may have established a near-term bottom, but this is by no means in an invitation to run into BP (BP) shares. Black clouds still loom over BP and let's be honest, buying this stock in hopes of an acquisition is foolhardy.

Believe it or not, there could be winners for investors following BP's dividend suspension. Perhaps the biggest allure of investing in integrated oil stocks is not the fact that they are sensitive to rising oil prices. In fact, integrated oil names like BP, Exxon Mobil (XOM) and Chevron (CVX) have a far lower correlation to crude prices than their oil services counterparts. The reason most investors are attracted to big oil is big dividends, but as far as BP is concerned, that reason has gone the way of the dodo bird.

On the other hand, Exxon and Chevron, the two largest U.S. oil companies, raise their dividends like clockwork. The dividend increase announced by Exxon in May represented the company's 28th consecutive year of higher dividends. Not to be outdone, Chevron followed up just a few days later, raising its dividend for the 23rd straight year. Even ConocoPhillips (COP), the third-largest U.S. oil company, with its less than-pristine balance sheet raised its dividend by 10% earlier this year. Occidental Petroleum, the fourth-largest U.S. oil company, raised its payout by 15% in May.

Occidental (OXY) said it has raised its dividend every year since 2002 and that its compound annual dividend growth rate is 14.4%. The company has been paying a dividend continuously since 1975 and this is a company that has no offshore drilling exposure. The bottom line is that investors do not need to fret in the wake of BP's dividend suspension. There are more reliable and less controversial options in the oil patch for dividend seekers.