BP dividend cut is no surprise and Diageo cash flow plunges

“After yesterday’s stimulus-driven gains the FTSE 100 was back on the retreat on Tuesday morning, falling 0.4% to a smidge above the 6,000 mark.

“A busy day for corporate results was dominated by BP and Diageo, both of whose fortunes were determined by different types of black stuff.

“Gold prices remain tantalisingly close to the $2,000 per ounce mark as fears of a second wave in the Covid-19 pandemic continue to simmer,” says AJ Bell Investment Director Russ Mould.

BP

“A massive loss, a dividend cut in half and yet BP’s results got an initially positive response from investors. Context is key.

“The dividend cut was perhaps the worst kept secret in the market – there was some surprise BP hadn’t acted sooner but nearly everyone expected a cut alongside these second quarter numbers.

“The coronavirus pandemic has had an outsized impact on demand for oil than that seen in other downturns with restrictions leaving cars on the drive, trains in the station and planes on the runway.

“BP also faces a challenge to keep its debt levels under control. It is worth noting that the 50% reduction in the payout is a less aggressive move than that seen at peer Royal Dutch Shell in slashing its own dividend by two thirds earlier this year.

“Which of these was the right course of action in the long run remains to be seen, given the short-term pressures and long-term challenges facing big oil companies amid volatile oil prices and a transition away from polluting fossil fuels.

“The loss BP announced this morning, linked to the writedown of the valuation of its assets, was no worse than analysts had expected, likely prompting a measure of relief.

“And the benefit of being involved in almost every aspect of the oil market was revealed by a strong showing from its trading division as it benefited from all the volatility.”

Diageo

“Sometimes seen as having defensive qualities, alcoholic drinks maker Diageo was nursing a pretty nasty Covid-19-linked hangover this morning as it published a disappointing set of full year results.

“While a £1.3 billion writedown might take the headlines, it is the worse than expected drop in quarterly organic sales and a substantial plunge in cash flow which are of particular concern.

“People may have enjoyed the distraction of a drink at home amid the difficult times of the last few months but this wasn’t nearly enough to compensate for the hit associated with sales in pubs, restaurants and bars or at big sporting events or music festivals.

“The drop in sales of Guinness in Europe was particularly eye-catching. A resilient dividend wasn’t enough to convince all investors to stay on board.

“And with guidance for debt to remain at elevated levels, the company may struggle to take advantage of any opportunities to acquire quality assets for bargain prices. Which could have been one of the silver linings of the crisis.

“There is also still no guidance on how the company will perform in the current financial year. Understandably predicting what will happen in the coming months is extremely difficult and firms do not want to make themselves a hostage to fortune.

“However, market patience with being kept entirely in the dark may be ebbing away faster than a shamrock on the head of a pint of the black stuff.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.