{"id":2531,"date":"2010-06-17T04:08:44","date_gmt":"2010-06-17T12:08:44","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=2531"},"modified":"2010-06-17T07:30:48","modified_gmt":"2010-06-17T15:30:48","slug":"bp-will-suspend-dividends-so-what","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/bp-will-suspend-dividends-so-what\/","title":{"rendered":"BP will suspend dividends! So what?"},"content":{"rendered":"

A new symptom of financial illiteracy has been revealed by the obsession with BP’s dividends<\/a> shown by politicians and the media, no doubt reflecting their readers’ sensibilities<\/a>.\u00a0 The narrative is that BP’s shareholders should share in the suffering their company has caused by having their dividends suspended.<\/p>\n

This attitude reflects what can only be called a pre-war (WWII) view of financial economics, an alternate world where the breakthrough insights of John Burr Williams<\/a> or the Nobel Prize winning theories of Miller or Modigliani<\/a> or the resulting empirical transformation of modern finance theory never happened.<\/p>\n

On an intuitive level, it doesn’t matter to the owner of a gas station if their cash is in the till at the office or their cookie jar at home. Why would it matter to the shareholders if their cash is still inside the company supporting their share price or mailed out to them in the form of a dividend check?<\/p>\n

Of course, the answer is it doesn’t matter.<\/p>\n

What matters is the degree to which the current and future cash of the company must be devoted to cleaning up the mess that BP created, which is a separate consideration from what happens to the remaining cash.\u00a0 BP’s shareholders are already aware that the mess will be very costly, and the company has not shied away from acknowledging that cost.\u00a0 That is why the company’s stock price has lost half its value since the rig explosion.<\/p>\n

The one sense in which dividends might matter is the result of the U.S. government’s dividend policy, i.e., it will be subjecting dividends received by all U.S. shareholders to much higher tax rates than the rates on capital gains starting next year.<\/p>\n

That means corporate owners will actually prefer that the money be kept inside the company so they can realize their gains in a higher share price rather than via more cash paid out in dividends.\u00a0 So, starting later this year, many companies will be looking for an excuse to cut their dividends.\u00a0 BP has the perfect, if unfortunate, excuse for an early implementation of a dividend policy which will eventually become widespread, and share prices will end up rising faster as a result.<\/p>\n

If the “penalize the shareholders” narrative had any validity, BP stock price should drop this morning at the open.\u00a0 I would bet that BP’s stock price will not budge to this non-story, and might even bump up, thanks to Obama’s dividend policy.<\/p>\n","protected":false},"excerpt":{"rendered":"

A new symptom of financial illiteracy has been revealed by the obsession with BP’s dividends shown by politicians and the media, no doubt reflecting their readers’ sensibilities.\u00a0 The narrative is that BP’s shareholders should share in the suffering their company has caused by having their dividends suspended. This attitude reflects what can only be called […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-2531","post","type-post","status-publish","format-standard","hentry","category-economics"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/2531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=2531"}],"version-history":[{"count":16,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/2531\/revisions"}],"predecessor-version":[{"id":2547,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/2531\/revisions\/2547"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=2531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=2531"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=2531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}