Question

UK-based oil company BP was under pressure to reduce or omit dividends on its ordinary shares as a result of a major oil spill from one of its exploration wells in the Gulf of Mexico. Subsequently, BP announced that it would omit some of its quarterly dividend payments. Explain why the reduction in, or omission of, BP's dividends may harm its shareholders.

Answer 1

When there is a reduction or omission of the payment of dividend, on the part of the company, it is taken negatively by the overall market, and it is taken in reference that the company is not able to meet with the estimated profit and the company is not inclined to fulfill the commitment of payment of dividend to the shareholders, so it would be taken in a negative aspect and the company will be going down the market capitalisation, so the overall value of the shareholders equity will go down with it.

Reduction in dividend is negative for estimation of profits of the company in the long run, and it is also negative for the reputation of the company because the market believes that the company is not obligating to its commitment of regular payments of dividend and a deduction in the amount will be leaving to sharp cut in its estimate and a large number of shareholders drawing out of the equity of the company, because they were Invested into company for payment of uniform dividend.