Best quote from the Gulf oil spill coverage? When asked what he thought of the CEO’s comment about the “small people,” the Orange Beach mayor said, “I don’t care what they call us, as long as they send the checks.” The real question is, “Will they bounce?”
BP has been ordered to establish a $20-billion trust fund to cover claims. Estimates are that the final bill will go over $60 billion. Does this multinational company have the ability to pay a bill this steep and still continue as a viable business?
First, know that BP has liability insurance. A collection of insurance and reinsurance companies hold policies for claims up to $2 billion, or 10 percent of the initial trust fund. Like any good insurance contract, there is a deductible. BP’s deductible is $250 million — chump change for this company.
In looking at BP’s last annual set of financial statements, one can see that about $10 billion was paid out to shareholders last year. Because you always retain some of your earnings, this payout represents about 60 percent of the earnings in 2009. In 2008, they paid out about 50 percent.
Since BP is sending out so much cash in the form of dividends, they’ve announced they are doing away with dividends… for now. In this announcement was the promise to reconsider dividend payments sometime next year. This seems like a slight blip for shareholders. I wonder if the folks on the Gulf will be back on track by sometime next year.
Last year, BP’s free cash flow was just under $20 billion. Free cash flow is the cash you earn from regular operations minus the cash you invest to generate future earnings. In other words, BP could siphon off the $20 billion without jeopardizing the future of the business.
Also, the money in the trust fund is not tucked under a mattress somewhere. It’s invested in something, probably treasuries. I’m told that earnings from the fund go back to BP and don’t stay in the trust. This fund will just be part of BP’s overall investment portfolio.
The $20 billion will be paid in increments over the next three and a half years. It’s the installment plan. They have about $12 billion in ready cash, and they will pay out $5 billion this year. I don’t expect they will find themselves cash-strapped.
In addition, the claims process is slow. BP is encouraging each individual/business to file one claim. This is an ongoing problem, and we don’t see an end yet to the spill. If I’m a business owner, do I have to wait for six months before filing? Don’t I have losses EACH month? More importantly, don’t I need THIS month’s income to pay for this month’s bills?
Insurance companies want the process to be slow. The longer the process, the longer they hang on to the money. Will BP take the same approach? This would certainly increase their earnings on the trust fund money and delay further distributions from their company pot.
In addition, many business owners are finding themselves in a bind when it comes to producing proof of income. “Under the table” business is not verifiable. If you can’t verify it, you don’t have a claim. Cash sales that never make it to your tax return simply don’t qualify. While part of me sympathizes with these folks, the dutiful taxpayer in me does not. After all, I’ve been paying my fair share all these years.
There is talk of some type of tax amnesty, but I don’t know how that would work. No records is no records. Can a claim be paid just because I SAID so? I think a lot of folks are finding out the hard way that paying your taxes is not just the right thing to do. It’s the smart thing to do.
All this makes it look like BP will come out of this intact. While $60 billion is beyond my brain’s comprehension, it’s within BP’s reach, given that it will be paid out over several years. BP’s pockets are deep, but their arms are short. We “small” people must depend on our federal and state governments to press them to reach deep to help the region heal. Just keep the checks coming! We’ll do the rest.
Nancy Lottridge Anderson, Ph.D., CFA, is president of New Perspectives Inc. in Ridgeland, (601) 991-3158. She is also an assistant professor of finance at Mississippi College. Her e-mail address is firstname.lastname@example.org, and her website is www.newper.com.
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