BP has announced that it would be suspending payment of its share dividend in order to deal with the oil spill crisis in the Gulf of Mexico. For the past 48 days, BP has been trying to contain an oil spill amounting to an estimated 60,000 barrels a day, or 2.5 million gallons of oil.
BP has agreed with US President Barack Obama to set aside £13.5bn ($20bn) in order to settle future compensation claims and £58bn has been wiped off the market value of the company since the oil rig exploded on 20 April, falling from £125bn to £67bn in just eight weeks. Its share price has plunged to a 14 year low. But how will this affect you?
Around 13% of the dividend payments that come from UK Equity Income funds is derived from BP, and the suspension of its dividend this year is bound to have a significant impact on returns. BP equates to around 6% of the FTSE 100, so if you have a fund that tracks this index you may also feel the affect of BP’s woes.
You can find out if the fund you invest in holds a weighting in BP by looking at the fund factsheet. These are easily available online, and usually display the top 10 holdings of the fund and how much is invested in each company.
The key question as BP’s share price tumbles if you hold direct BP shares is whether you should sell now to avoid further losses. By doing this, you run the risk of crystallizing the losses, which would mean you lock in how much has been lost without giving the shares a chance to recover. You should take independent financial advice before making any decisions with your disposal of your shares.
You will not be receiving any payment from your BP shares this year. The company is entitled to do this as dividend payments are discretionary and can be cancelled at any point.
With the share price so low, there have been reports of huge increases in investment in BP shares. Stockbroker TD Waterhouse reported this week that trading volumes have doubled, making it the largest retail investor buy.
The biggest concern that has been raised is the impact that the BP oil crisis will have on the UK’s pension funds. BP’s dividend income provides the majority of pension funds with £1.8bn in dividend payments every three months.
However, it is important to remember that pension funds are long-term investments and invest in many companies. BP represents around 1.5% of a typical pension fund so while the losses are not ideal, it does not necessarily mean that the value of your pension will dramatically decrease to critical levels.
If you are just about to retire and your pension fund is maturing, you may not be too badly affected by BP’s crisis. As your pension plan heads towards maturity, you will move out of equity investments like BP towards less risky assets like bonds and, therefore, your exposure to BP will be reduced.
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