As Luck Would Have It Part 1
One of the most important lessons arising from the Gulf of Mexico oil spill is that disasters turn out to be more costly than original estimates.
Older readers may recall that back in the 1980s the Lloyd’s of London insurance market greatly underestimated the scale of natural disasters in the early stages only to have to face reality when the bills started to roll in. It was one of the reasons why Lloyd’s got into a mess that required a radical restructuring to sort out.
The trauma at BP (BP.) will prove to be less serious and shorter lasting than the self inflicted wounds at Lloyd’s and it is reassuring to hear that dividends may be resumed early in 2010.
However, the total bill in the Gulf has now topped $40 billion, double the early estimates that were supposed to be the worst case scenario. Extra provisions have been made because the clean-up took longer than expected with equipment having to be disinfected after use and staff kept on standby until the leak was finally sealed.
There is good news among the human, natural and financial horrors. BP actually made a third quarter profit after adding an extra $7 billion to its provisions as it benefited from a higher oil price and a sharp improvement in its refinery division. There is every reason to believe that substantial profits will soon be the order of the day once more.
New chief executive Bob Dudley is a lucky man, having inherited a disaster that was already being sorted. Luck is a great asset to have in your chief executive. He will feel even luckier when he restores the dividend for the final quarter.
Although he has gone no further than say the signs for a dividend are encouraging, it will undoubtedly happen barring another unforeseen disaster. The payout will certainly be lower than the 14 cents paid in the first quarter of the year before BP was forced to skip two quarterly payments.
Expectations are for 10.7 cents. I think that is on the optimistic side given that Dudley will not wish to provoke the American regulators, politicians and lawyers. He will surely prefer to err on the side of a small payment that can be increased to previous levels fairly quickly once the fines are decided and paid.
BP is no longer a company for investors to avoid. Its shares have recovered from 303p to top side of 400p but are still well short of their previous level above 600p. If I did not already own shares in Shell I would be buying BP now.
As Luck Would Have It Part 2
The new chief executive of Lloyds Banking Group (LLOY) may prove equally lucky. His current employer Santander has proved rather more adept at picking up bombed out UK banking disasters than Lloyds has.
Not that Santander is beyond criticism. Its attempt to bring Bradford & Bingley, Alliance & Leicester and Abbey National onto one system has provoked a stream of complaints to the money pages of national newspapers about delays and blunders.
At least these acquisitions did not drive Santander into a government bailout, as the takeover of HBOS did for Lloyds. That will not worry Antonio Horta-Osorio, who switches over to Lloyds in January and takes the reins from Eric Daniels in March.
Horta-Osario takes over as Lloyds continues on the road to recovery. In the third quarter it paid back £7 billion of emergency funding it received from the Bank of England and confirmed that it was heading for a profit this year as less money is being set aside to cover defaults on the HBOS loan book.
Another piece of good fortune for the Portuguese banker is that he could earn £8.3 million a year in pay, pension contributions, bonuses and incentives. I use the term 'earn' loosely.
Daniels finally bowed to intense pressure and waived his last bonus. Horta-Osairo will not feel obliged to make any such sacrifice. After all, it was Daniels and his chairman Victor Blank who negotiated the disastrous purchase of HBOS. In any case, as long as Lloyds remains in recovery mode there will be little or no outcry from institutional investors who are notoriously unwilling to stand up to company executives, at least in public. It was the fund managers who voted for the HBOS deal in the first place.
Horta-Osario’s £4.3 billion share incentive plan is triggered at 114p. Who will dare to complain if that happens? Not the shareholders, whose stakes have struggled to rise from below 50p. Not the Government, which will at that stage be showing a profit on its 43% stake.
As far as investors are concerned Lloyds is very much for the long term. Once the share price gets to the point where the government can sell at a clear profit it will do so and the overhang will depress the share price until the entire stake has gone, which could take many months.
Also it may be some time before Lloyds restarts its dividend, probably at a quite modest level. Like BP, the bank will prefer to kick off on the low side to leave room for increases year by year. Like BP, this is no longer a company to avoid.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
