A Change in the BP Situation Regarding the Dividend Yield Support

This morning, BP was trading between $30 and $31 per share, down more than 50% since the oil spill in the gulf began.  My “stupidly cheap” valuation was based at $33 per share but there is a slight monkey wrench thrown into the equation: The United States Government is exerting as much pressure as possible on the Board of Directors to stop future dividend payments.

One of the valuation assumptions built into the model was something known as “dividend yield support”.  If a dividend is relatively safe, there is only so low a stock can fall before market forces drive it up to more reasonable levels.  In a world of 1% interest rates at your local bank, if you could get a 10% cash yield on shares of BP, for example, you might seriously consider buying shares.  This provides a “floor” of sorts below the stock.

If the dividend is cut, it will, paradoxically, make the shares worth more in the long-run because the cash will build up at headquarters and get the entire mess behind the firm faster than would otherwise be possible.  However, it would remove the safety net that is the yield floor, which means the shares could literally fall to $10 each because there would be nothing stopping it from happening.  Then you get into a situation where it is more difficult for BP to raise money if they need to because the value of the equity is lower.  In an extreme situation, the drop in equity value could lead to a bankruptcy filing (not highly probable but still possible).

In other words, the company appears to be completely capable of paying all of the costs but the same, worthless politicians that have screwed up our national balance sheet are going to try and destroy the company to score a few cheap political points.  They don’t realize that the shares are owned by almost every worker in the United States through their 401(k) index funds.  That is how stupid they are.

With that said, I’m revising my valuation downward to adjust for this “war on the dividend” that Obama insists on pursuing.  I’m not going to commit a significant amount of capital until I can re-run the numbers with a no dividend payout scenario.  One thing is for certain, though: This is going to be a wild rollercoaster ride that most people will not be able to emotionally handle.  It makes me upset a bit because this is a stock considered by many to be a retirement dividend paying stock.  It’s the older folks who rely on the income who are going to get screwed.

This is known, by the way, as “political risk” in economics.  You have a situation where lawmakers are influencing the value of the equity and debt instead of pure economics.

Related posts:

1. How Dividend Yield Can Drive Stock Price Changes
2. Mail Bag – Which 5 Dividend Stocks Would You Want to Own If You Had to Put Your Entire Net Worth Into Them and Couldn’t Change for 50 Years?
3. To Earn More In Dividend Income Than 50% of the World Earns Working Each Year Requires Only 1,074 Shares of General Electric
4. Dividend Investing In My Retirement Plans
5. A Look at Inflation-Adjusted S&P 500 Data for 1960 Through 2010 and Dividend Reinvestment vs. Non Dividend Reinvestment
6. Earnings Yield as a Value Investing Strategy
7. Dividend Investing In My Retirement Account – Part II (Six Month Update)
8. A Lesson About Dividend Reinvesting from Sharebuilder
9. How Pensions and Annuities Change Your Asset Allocation
10. The Monopoly Stock Exchange Add-On Is the Only Way to Play