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 failure on the part of the company on the payment of the dividend, it will mean that the company is not able to make enough profits in order to maintain with the consistent flow of dividend or it will also mean that the company is not disciplined in the payments of the dividend so it would be taken negatively for the company and it would be reflected in the share price where there would be sharp correction the overall prices of the shares of company.

there are certain number of investor who are interested into companies because of payment of regular dividend and those investors, if they are not getting the regular dividend or their getting a curtailment of the dividend then they would be highly sceptical to invest into the longer period perspective into the company so they would be getting out of their investment so in this case the company will be losing out on shareholders as well as overall market capitalisation.