Dividend Policy

Reduction in Dividends and Shareholders

Introduction

Dividends have been considered one of the main attributes that attracts investors. A regular stream of dividends always motivates investors towards higher investment in the company. Furthermore, a regular stream of dividends indicates that company financial position is healthy and if company reduces their payout, this might directly impact on their performance. In this section, the focus would be on examining the reduction of BP's dividend and this whether or not harm shareholders.

Discussion

BP is the largest oil company that offers Oil and gas services to the customers across the globe. They are moving towards more oil production and exploration. BP has always had attractive dividend policy, but due to Oil spill in Gulf of Mexico BP has to suspend their dividends for at least three quarters (BP, 2013). The following is the dividends distribution of BP till 2012.

Dividends at BP

According to John Rock, the only thing that gives investors pleasure is the payment of dividend. The financial health of company is usually measured in terms of stock dividends. Dividend as we know that it is distribution of profit to the company's shareholders that further shows how well company has been performing. Company that is giving higher dividends termed as best company. This also shows that company stock price has been improving when higher dividend payment is made to shareholders (Boehme, n.d).

The reduction in BP dividends might harm shareholder in a sense that investors will reduce their investment in the company. Since BP has been distributing dividends even when they were posting losses, an immediate decision of reduction in dividends might overall reduce their shareholder equity.

But according to the researchers and analyst, BP has been constantly under-budget their legal issues so it would not be issues if BP market goes erroneous and dividends reduction take place. During 2010, BP suffered $40.9 billion loss and due to this company has to cut their dividends entirely; hence company had to sell their asset worth $30 billion to meet up their requirements. Therefore, if BP has experience a loss due to oil spill, this does not mean that entire dividend will be cut out. BP has never been so optimistic with its current dividend policy. They have always given certain portion of their profit to their shareholders. Dividend yield of BP has always been extraordinarily high. Market always has expected higher dividends due to their spending pattern (Balachandran, Krishnamurti Krishnamurti, 2007).

Theoretical Models of BP

According to books, there are two type of dividend polices i.e. managed and residual. BP has been following managed dividend policy. The reason for this is that BP given more priority to their shareholder. Previous examples clear this point. There are five models which usually adopted by companies i.e. High Dividends Increase Share value Theory, Tax effect Hypothesis in which low dividend rise shareholder value, Dividend Irrelevance Theory, Clientele Effects and Agency Cost & Free Cash Flow Hypothesis (chicagobooth).

Looking at the BP dividend trend, it is clear that ...