BP's dividend looks sustainable

BP reported a 63% drop in quarterly profits this week, but will concentrate on maintaining its dividend.

"The financial crisis has stuck a stopper in the oil sector," said Lex in the FT. This week BP reported a 63% drop in quarterly profits. A similarly sharp drop for Shell confirms that problems go right to the top of the industry.

Tony Hayward, BP's CEO, has been grappling with "the most difficult choice of his career", said David Wighton in The Times: he can either "cut the dividend and face the wrath of investors, or curb the group's spending plans at the expense of future growth".

BP is concentrating on maintaining its dividend and plans to trim its $20bn capital expenditure programme this year. It reckons it needs a long-term oil price of $55 a barrel to fund investment and the payout, and hopes to get this figure down to $50 as industry costs deflate following the end of the commodity boom.

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BP is having to borrow more to sustain both the payout and "a decent level" of capital expenditure, said Jeremy Warner in The Independent. But it can afford to let its balance sheet take this strain, said Lex. Gearing rose in the first quarter to 23%, but is well below its 30% ceiling.

So the dividend looks sustainable. Members of oil cartel Opec could "revert to form by cheating on their production quotas", said Nils Pratley in The Guardian. But "a year or two of stable oil prices, followed by a drift upwards" which the futures market is pencilling in should be enough for BP to "squeak through".

BP: 485p; 12m change -16%