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Jun 16, 2010

BP shares jump despite dividend cut

It is not the first time a dividend cut has been met with a share price rise

Dividend cuts are usually met with a howl of indignation from shareholders. Not so with BP, however.

The oil and gas giant confirmed on Wednesday it would suspend its first dividend payment of 2010 – worth $2.6 bn to investors – and not make any other payouts for the rest of the year. The following morning, BP’s shares surged almost 10 percent. By the end of the day’s trading, the shares had slipped slightly, but remained up nearly 7 percent.

The dividend cut, along with the $20 bn relief fund also announced on Wednesday, has provided some much-needed respite for BP’s shareholders, who have seen the company’s market capitalization battered since an explosion on the Deepwater Horizon oil rig in the Gulf of Mexico two months ago, which led to the US’ worst ever oil spill.

Before Thursday's rally, BP’s shares stood at 337p, nearly half the value they were before the oil spill began.

The dividend cut didn’t adversely affect the share price because it was clearly flagged beforehand, according to Keith Bowman, equity analyst at UK stockbroker Hargreaves Lansdown. ‘It’s all down to expectations,’ he says. ‘There aren’t too many times when a dividend cut is clearly flagged beforehand; because it was clearly flagged, we are seeing this relief.’

‘I wouldn’t call it out-and-out happiness from investors,’ adds Bowman. ‘I think it’s more of a relief rally. Although there is still considerable uncertainty, these figures do give us something to work with near-term.’

It is not the first time a share price rise has followed a dividend cut. In June 2009 Rio Tinto saw its stock rise after canceling its interim dividend and saying the final payment would be subject to trading conditions.

Like BP, Rio had a lot of other things happening at the same time as the dividend cut. In Rio’s case, the firm announced on the same day as the cut a joint venture with BHP Billiton and a $15 bn rights issue to help meet its debt obligations.

‘Similar to BP, there was a lot of other information announced at the time,’ notes Bowman. ‘Investors tended to like the detail there and we actually saw the share price rally for a few days afterwards.’