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Weekend reading: BP’s dividend and FTSE value

Weekend reading: BP dividend and the FTSE

My regular weekend reflection on investing, followed by some good reads from across the web.

I mentioned yesterday that I thought BP shares were a good buy at 435p, but that there were certainly risks to buying.

The biggest short-term risk is that BP’s dividend is cut or suspended, even if it has the cashflow to support it as well as its clean-up commitments. Politics or PR might force a gesture.

A dividend cut or suspension would have implications for all UK investors, not just BP shareholders. Roughly £1 in every £6 paid out by UK shares comes from the oil giant.

This also has an implication for whether the FTSE is currently cheap compared to the risk-free rate of return from UK government bonds, aka gilts.

As of last night:

  • The yield on the 10-year gilt was 3.59%
  • The yield on the FTSE All-Share was 3.51%

One way of judging their relative value for money is to divide the gilt yield by the equity dividend yield:

  • Gilt to equity yield ratio = (3.59/3.51) = 1.02

That low ratio would normally be very bullish for UK equities. The average since the 1950s has been closer to 2, and most times it has dipped below 1 it’s been a very positive for shares (September 2008 was a big exception).

What if BP entirely suspended its dividend? That would reduce the FTSE All-Share yield to below 3%, and push the gilt/equity ratio over 1.2.

Shares would still look pretty cheap on the measure, but they would be more vulnerable to, say, long-term interest rates inching up.

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{ 6 comments… add one }
  • 1 Mike Piper June 5, 2010, 12:49 pm

    Thanks for the link! 🙂

    Also, I’ve been curious for a while: Why do you use the site name for the link text rather than the article title?
    .-= Mike Piper on: Investing Blog Roundup: Retirement Planning and Investing Terminology =-.

  • 2 Financial Samurai June 5, 2010, 3:36 pm

    I just don’t think that the dividend will be sustained. They will cut the shizam out of the dividend so you can’t look at it from that angle, although it is enticing to do so!
    .-= Financial Samurai on: Only The Poor or Super Rich Say, “Money Can’t Buy Happiness” =-.

  • 3 The Investor June 8, 2010, 10:48 am

    @FS – Yeah, if I was forced to bet I’d imagine they’d halve it for a year or two, mainly for political reasons.

  • 4 The Investor June 8, 2010, 10:49 am

    @Mike – You’re welcome! Regarding the link style, I just hate long pages of links really, and find this more elegant. I link off the article title or similar from within articles, but all on one page looks ugly. (I don’t think there’s much PR loss to the recipient site, because I don’t think these linkfests have much page rank to give due to dilution).

  • 5 Mike Piper June 8, 2010, 5:57 pm

    Okie dokie.

    And, congrats on 1,000 subscribers! 😀
    .-= Mike Piper on: Can I Retire Yet? (And Other Retirement Planning Questions) =-.

  • 6 The Investor June 8, 2010, 6:27 pm

    I hadn’t noticed – thanks Mike! 🙂

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