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It’s hard to keep up with oil companies’ dividend policies. One minute they’re slashing payments to shareholders in the face of a pandemic that, supposedly, had permanently lowered the outlook for oil prices. The next they’re saying the coast is clear and divis can rise again.
Shell last week provided a classic example of this stop-start approach when, having cut by two-thirds last year, it announced a 38% increase. BP offered a less chaotic picture on Tuesday but the basic plot was similar. Last year’s halving of the divi was followed by a 4% increase, rather than the previously flagged zero.
BP also threw in a promise that the same rate of annual increase can be maintained all the way to 2025 as long as a barrel of Brent fetches around $60. If it does, BP will aim for $1bn of share buy-backs a quarter, which, at the current valuation, equates to buying in 5% of the equity every year.
“What you’re seeing around the dividend is really a story of confidence,” declared Bernard Looney, BP’s chief executive. Well, up to a point. Yes, part of the story is increased confidence that oil prices (currently just above $70) won’t collapse again. But the other half of the tale is the quiet rebellion among shareholders over last year’s divi treatment. The investors, even as they say they’re up for “transitioning” to a lower carbon future, also want to see the cash, in their pockets, from today’s oil production.
At $60 or $70 a barrel, the script roughly works. Shareholders, fed with short-term divis, are more likely to overcome their doubts about the long-term financial returns that can be generated by being a late-comer to the business of investing in solar and off-shore wind projects.
One wonders, though, what would happen if the oil price goes much higher. At what point would Looney come under pressure to rethink his plan to cut oil and gas output by 40% by 2030 or to tone down the renewables budget? He has definitely won more supporters for his strategy over the past year – no question. But shareholders’ thirst for dividends is still more obvious than their backing for long-term green projects.
Better to travel than arrive
On and off, Smiths Group has been trying to sell its medical division for about a decade in the interests of simplifying the broadly drawn FTSE 100 industrial company. The big day finally arrived on Monday after the London market had closed – a disposal to US private equity firm TA Associates at an enterprise value of £1.7bn. Cue a 10% plunge in Smiths’ share price as investors reacted on Tuesday. Call it a severe case of it being better to travel than arrive.
There were two problems with the sale in investors’ eyes. First, the price is about £300m shy of expectations. Second, Smiths is keeping a 30% stake, rather than selling the lot, so an interest in medical equipment such as ventilators and single-use devices will be hanging around.
“We sense relief from management that this deal has been announced, rather than this being a good outcome,” said Jefferies’ analyst politely.
Paul Keel, chief executive only since May, can’t be blamed for the underwhelming terms since every interested party has had years to declare itself. But his upcoming strategic rejig, designed to juice up growth within the rest of Smiths’ mechanical seals-to-airport scanners portfolio, now needs to create a buzz. The exit of the medical division was meant to provoke a reappraisal of an unfashionable conglomerate. It hasn’t yet.
And here’s my Tencent…
Another day, another fall in the share price of a major Chinese company on the receiving end of a rebuke from Beijing, or, in this case, its state-owned media. A condemnation of computer games as “spiritual opium” was quickly followed by Tencent announcing restrictions on how long children can play its online games. In the end, the fall in the company’s share price was only 6%.
In other sectors, Beijing’s crackdown has been felt more keenly. Tech companies are in the spotlight on data. Private tutoring firms, sporting New York listings at previously fancy valuations, have been told to run not-for-profit models. And property firms have been told that houses are not for speculating.
The common theme, says Neil Campling at Mirabaud Research, is that “social inequality is being stamped on”. He’s probably right. The crackdown is not as arbitrary as it may look. But, until that narrative becomes absolutely clear, by rights everything Chinese should carry at a discount for political risk. After a lively couple of months, that’s almost today’s position.
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