Income funds may dump BP if dividend cut

* BP accounts for 12-13 pct of UK dividend payouts

* Average fund holding 6 pct – Lipper

* BP can afford $10 bln payout, political pressure builds

By Claire Milhench and Raji Menon

LONDON, June 3 (BestGrowthStock) – UK equity income funds may be
forced to dump BP (BP.L: ) if it stops paying its dividend and may
have to switch to other high dividend paying stocks in the FTSE
100 index, income funds managers said on Thursday.

Political pressure is building on the company to suspend
dividend payments — which total $10.5 billion a year —
following its failure to stem the oil spillage in the Gulf of
Mexico.

BP accounts for some 12-13 percent of the UK’s dividend
payouts, so equity income funds would take a major hit from the
loss of income, adding to a steep fall in BP’s shares.

BP shares were trading at 432 pence on Thursday, down over
30 percent from its April high, so many managers still holding
the stock are expected to stick with it in the hope of recovery.

“If they cut dividends, it’s going to affect all the funds,”
said George Luckraft, lead manager of the Axa Framlington Equity
Income Fund. “It will be 12 percent of the yield of the market
disappearing.”

Annual dividend growth is forecast to be 10 percent in the
year to March 2011 from the 752 stocks in the UK dividend
universe, but if BP halts its payout for the rest of the year
that growth is slashed to 1 percent, analysts at Collins Stewart
estimated.

If BP halves its dividend, the growth shrinks to 4 percent.
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For a graphic showing BP’s dividend yield and share of total
FTSE 100 dividends, click here: http://r.reuters.com/fuf97k
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UK pension funds have about 1.5 percent of their assets in BP
shares and have seen some 4 billion pounds ($5.9 billion) wiped
off that value recently, the National Association of Pension
Funds estimated.

“The share price has taken a 70 billion pound hit so you
probably wouldn’t want to get out of it now, it looks like deep
value,” said Mark Whitehead, an international equity income fund
manager at Sarasin & Partners.

But if a dividend cut lasts beyond two quarters, Luckraft
said managers may be forced to look elsewhere or face a gaping
hole in their income account.

“If it’s not going to be restored for a long time, they’d
probably have to sell it,” he said. “Royal Dutch Shell (RDSa.L: )
is similar (to BP in terms of dividend yields), then you have
AstraZeneca (AZN.L: ) which offers quite good yields, and the life
companies. But BP offers the highest yield of the big ones.”

Several banks, notably Lloyds (LLOY.L: ), which had paid
healthy dividends, have cut or scrapped payouts as their balance
sheets have been battered during the financial crisis.

HIGH EXPOSURE

According to Lipper data, the average holding to BP across
the UK equity income universe is 6 percent.

“They have to own BP because it’s a big dividend producer
but that is a massive concentration risk,” said Whitehead.

The Jupiter Income Trust had an 8 percent exposure to BP at
the end of April and BlackRock and Newton’s income funds had 5.3
percent and 4.2 percent respectively.

“It’s important to know if it’s likely to be just a one-off
cut for one year to recognise the political element or whether
it’s a more longer-term rebasing of the dividend,” said one fund
manager who did not want to be named. “And if it is more
long-term, we have a fundamental problem.”

Asset managers are divided on whether BP will bow to
political pressure.

“Two senators have already written to (BP CEO) Tony Hayward
suggesting he doesn’t pay the dividend, and there is pressure
from Obama on the company so maybe there will be a political
deal,” said Julian Chillingworth, chief investment officer of
Rathbones Unit Trust Management.

“From a shareholder’s point of view they would have to come
up with a pretty strong justification to do that but these are
extreme circumstances, there’s never been a spill on this level
in the U.S.,” he said.

Stock Market News

(Editing by David Cowell)

($1=.6783 Pound)

Income funds may dump BP if dividend cut