Fresh blow for income investors as BP cuts dividend

Fresh blow for income investors as BP cuts dividend

Oil giant BP is the latest company to cut its dividend payments in the aftermath of the coronavirus pandemic, delivering a fresh blow to income investors. 

In an update to the market this morning (August 4) the company announced it had slashed its dividend for the second quarter by 50 per cent to 5.25 cents per share, down from 10.5 cents (8.34p) earlier in the year. 

It was after it reported record quarterly losses of $6.7bn (£5.1bn), largely due to writing down the value of its assets after oil price cuts.

The oil industry was decimated by the impact of the coronavirus crisis earlier this year, with the price of US oil turning negative for the first time in history in April. 

Global lockdowns limited both domestic and international travel, meaning demand for oil fell through the floor and producers scrambled to find somewhere to store it.

Bernard Looney, chief executive at BP, said: "I want to acknowledge the impact the reset dividend will have on many - whether individual retail investors or large holders.

"However, it is a decision that we wholeheartedly believe is in the long-term interest of our stakeholders."

In April Royal Dutch Shell was the first major oil company to cut its dividend following the tumbling price of oil in the preceding weeks.

It served a major blow for UK income investors as the company was the biggest dividend payer of the FTSE100 in 2019, consistently among the largest UK dividend generators.

Chris McVey, manager of the FP Octopus UK Multi Cap Income Fund, said after a raft of dividend cuts in recent months today’s announcement would feel like "another big knock for investors" who once relied on dividend stalwarts like BP for income.

Mr McVey added: "We know from our own analysis that many UK equity income fund managers had already reduced their positions in BP, likely in anticipation of this news.

"Yet it remained the third most popular income stock across the sector and was a top 10 holding in 43 per cent of income funds.

"Once again, this highlights the significant concentration risk for UK income investors and should demonstrate the need to look more closely at the underlying holdings when choosing a fund."

As the coronavirus crisis hit balance sheets, hundreds of firms were forced to cull or slash their dividend payouts to shareholders in an attempt to form a cash buffer against the economic impact of the pandemic.

Other firms were forced to hold back on payouts. The Bank of England strongly suggested banks and insurers suspend their dividends, while the government mandated any firm using a support scheme should not be paying out funds to shareholders.

According to Link's dividend monitor, the total paid out from UK companies in 2020 is expected to be a mere £56bn in a worst-case scenario, and little better at £61bn in a best-case future.

By comparison, the UK paid £111bn in dividends in 2019.