Ashby: History tells us now is not the time to sell BP

Veteran income fund manager Graham Ashby explains why now may not be the best time to sell BP and how the UK equity market could still deliver positive dividend growth in 2010.

The King is Dead. Long live the King!

Despite the protestations of many fund managers and politicians such as Boris Johnson, the fact is that the FTSE 100 futures market is already forecasting that BP will be forced to cut or temporarily suspend its dividend payments. This has prompted howls amongst many commentators that such a move would signal the death of UK pension and equity income funds, as BP accounts for approximately 12% of the UK equity market's dividend income. Instead, investors are being advised to shift their money into more diversified equity markets overseas or to buy ‘safe' yielding instruments such as Gilts.

However, let's remind ourselves of what happened to BP when it last cut its dividend. Back in the second quarter of 1992 BP was forced to cut its dividend - resulting in the departure of then CEO Bob Horton and many UK investors selling the stock, driving the share price down from a peak of just under 200p in 1990 to a low of 90p just two years later. US-based ‘deep value' managers took advantage of this forced selling to build up their holdings in BP - and saw the value of their investment dramatically increase over the next seven years.

In other words, although dividends are an important part of long-term wealth creation, selling a stock just because it cuts its dividend payment is not necessarily the smart thing to do - especially if there is a reasonable expectation that dividends will resume at some point in the not-too-distant future.

Secondly, the outlook for dividend growth from the rest of the UK equity market continues to improve. According to recent research from UBS, UK corporate balance sheets are now the strongest in nearly a decade and many UK-listed companies are taking advantage of a modest pick up in economic activity and continued high levels of profitability and cash generation to increase their dividends to shareholders. In addition, many of those companies that cut or passed dividends during the credit crunch are now returning to the dividend list - for example, Barclays, Carnival and Rio Tinto. As a result, analysts at Collins Stewart calculate that the UK equity market could still deliver positive dividend growth in 2010 - even if BP were to suspend any future dividend payments.

Finally, the UK equity market is itself incredibly geographically diverse, contains a number of world-class companies and typically trades at a significant discount to its overseas peers. Where else could you invest in a leading global retailer like Tesco, innovative fast moving consumer goods companies like Reckitt Benckiser or Diageo, or specialist engineering companies like Rotork or Ultra Electronics at prices that overseas investors can only dream of in their own domestic markets? No wonder shareholders in Prudential protested about the company issuing more shares to buy a much more highly priced business in Asia, and Chloride has recently received competing bids from Emerson and ABB.

It may not be consensual, but I passionately believe that UK equities are an attractive place to invest - even if the short-term outlook for dividends at BP is uncertain.

Graham Ashby is the LV= head of UK equities and manager of its UK Equity Income fund.