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Question:

Carefully examine why the reduction in or omission of BP’s dividend may harm Shareholders.
 
 

Answer:

A dividend is the amount that us paid by the companies to its shareholders. This is mainly the part of the profits. When the corporation earns a profit over and above its expense, the company usually invests the same in the business and this is known as the retained earnings. The company pays a portion of that profit to its shareholders as dividend. The distribution of that money to the shareholders could either be in cash or in case, the company has a dividend reinvestment plan, then the amount could be paid by the issue of the further shares or by share repurchase ("Dividend Calendar for May 08, 2017", 2017).

The dividend is paid on the basis of the fixed amount on each share with the shareholders receiving the dividend in the proportion of their shareholding. In case, the joint stock company, the dividend that are paid by the company to the shareholders forms the part of the after tax profit amongst the shareholders. The retained earnings are mainly shown in the equity section of the shareholders on the balance sheet of the company and forms the part of the issued share capital (Levitt et al., 2017).

The dividend paid are the corporate profits that are distributed to the shareholders. The factors that affects the payment of the dividend includes the factors like the profitability of the company, the needs of the capital, the trends in the stock price and the expectations of the investors. Any company must act in the best interest of its shareholders so that the decisions regarding the dividend considers the impact of the same on the business of the company, its share price and the value of the shareholders investment.

 


Profitability: this is the single major factor for the company. Any company that earns profits, must pay dividend to its shareholders. The more amount of profit the company generates, the more it is able to afford the pay out in the form of the dividends. In case the company is going through some financial difficulties, then the company cannot afford the dividend amounts. The accumulating losses could hamper the existence of the company and hence, in order to survive the company will have to stop paying dividend.

Capital Needs: the company could use the profits in many ways. It could reinvest the profits back into the business so that it could grow or expand. It could acquire another business or buy back its own stock so that it could boost up the stock price. The addressing of all these needs would act as a balancing act whose outcome leads to the determination of the way the amount of the profit would be paid as dividend and the way in which the corporate needs could also be addressed.

Investor Expectations:  the companies know their base of the investors. They actually know the investors that olds their stocks and why they hold their stock. There are investors that are conservative, as in, they are more income oriented who would like to buy the stocks so that they pay the generous incomes and increase the same over the period of time. The companies try to maintain the predictable dividend policies so that the investors are happy and they do not sell the stocks since too much selling of the stocks could lead to the decrease in the price of the stock in the market. There are companies that borrow money in order to maintain the dividend at the current level so that the investors are happy.

Dividend Coverage: the company make ensure that the dividend is enough so that the investors are happy but not too excessive. This is so that the company could continue its existence. The ratios of the current profits of the company to the current amount of the dividend is mainly known as the dividend coverage and the ratio of the current profits is called dividend pay-out ratio.

 


Enhancing Shareholder Value: the increase in the amount that is payable to the shareholders in the terms of the dividend is much more valuable to the investors that are inclined towards paying more. This is mainly due to the fact that the decrease in the amount of the dividend is the sign of decrease in the amounts of the profits that the company is earnings or the company is facing some of the financial difficulties. The amount of the dividend that is paid by the company affects the price of the stock and is much more than the actual amount of the dividend. Many a companies often pay smaller amounts of the dividends so that the stock price increases periodically ("Dividend Payment Factors", 2017).

The following are further factors that affects the dividend policy:

  • Type of the industry: the nature of the industry to which the company belongs plays a vital role when it comes to deciding on the policy of dividend. When the industries are stable, then those companies could adopt a more stable dividend policy as opposed to the company that are considered to not stable. Or when the earnings of the company are considered to be uncertain and uneven. These companies have a conservative approach when it comes to paying the dividend.
  • Structure of the ownership: the company that has a higher holdings of the promoters would always prefer to a lower amount of the divined since paying dividends could lead to a reduction in the value of the stock but in the case of a high institutional ownership, a high dividend pay-out is recommended since it helps in increasing the control over the management of the company.
  • Age of the company: the companies that are newly formed would like to retain the majority of their earnings with themselves so that they can retain the same for further growth and expansion. They would also follow the conservative policy like the companies that are not established that pays a higher amount of the dividends form their retained earnings.
  • The extent of the distribution of shares: any company that has an increased number of shareholders would always never agree to a conservative policy of dividends. On the other hand, the company which is closely held would have an increased chances of finalising the conservative dividend pay-outs ("17 Factors affecting Dividend Policy: Profitability, Industry, Ownership, etc", 2017).
  • Difference in the expectations of the shareholders: this factor includes the diversity in the type of the shareholders that the company has. A different group of the shareholders would have different expectations whereas a retired shareholders would have a different requirement of being a wealthy investor.
  • Leverage: the company would have more leverage in the financial structure and also be frequent when it comes to paying the interest. This would help in deciding the lower amount of the dividend pay-out. But when the company utilises the retained earnings, then the company would prefer to pay the higher amounts of the dividend.
  • Future of the financial requirements: the dividend pay-out would depend upon the future requirements of the company for the additional capital. The company would have a profitable investment opportunity when the company is justified in terms of the retained earnings. But the company that has no internal or external capital requirements must opt for a higher amount of the dividend ("10 Most Important Determinants of Dividend Policy | Financial Management", 2017)
  • Business cycles: when the company is going through a boom period, then it is obvious that the company would save up for the recession period.
  • Growth: the companies that have a higher growth rate would reflect the same in the annual growth of sales and the ratio of the retained earnings to equity and also a return on the net worth and that would prefer the higher dividend pay outs that would keep the investors happy.
  • The change in the government policy would also lead to the different dividend policy of the company.
  • If the company earns a profit, then it would pay dividend, otherwise not.

The following are the advantages for paying dividend to the shareholders:

  • It keeps the investors happy ("7 Biggest Benefits and Drawbacks of Dividend Investing | Wealthy Education", 2017)
  • The investors always would prefer certainty in the amounts of the dividend when compared with the higher amounts of the capital gains in the future.
  • The investors would always prefer the company that has a track of record of dividend since it reflect stability for the company.
  • The investors could go without selling the stock if he is paid a regular dividend
  • A company that is mature may or may not have the attractive venues for reinvesting the cash could also have the expenses that are related with the research and development. In such a case, the investors would always prefer to pay the company excess cash so that the same could be reinvested for the higher returns.
  • When the company makes the announcement of paying the dividend, then it gives a string signal about the future prospects of the company and this leads to an increase in the share price of the stock ("Advantages and Disadvantages of Paying Dividends | Kibin", 2017).

The following are the disadvantages of paying dividends:

There is a loss of the investors of the company if the company is not able to pay dividends over a period of time ("Advantages and Disadvantages of Stable Dividend Policy", 2017)·        
 
When the company pays dividend, the retained earnings decrease and hence, the debt obligations and the expected expenses could rise and the company may not have enough ash for the same.·       
 
 
 
The paying off the dividend would lead to the reduction in the amount of the cash that is usable and also this limits the growth of the company.·        
 
The paying off the dividends requires a lot of record keeping in the books of accounts of the company. The company does this in order to make sure that the right owner of the share receives the dividend (Mason, 2017).

The decision of not paying the dividends comes after weeks of speculation over the fate of the annual payment. This hurt the major pension plan since the pay-out accounts to about one sixth of the dividend of the blue chip companies in the UK.

The shares of the company fell to 46 pc when the Deepwater Horizon rig sank and this was followed by the explosion which killed 11 workers of the company. The president of the US then stated that any loss would be borne by BP ("BP to Cut its Shareholder Dividend?", 2017).

The various pension experts stated that the company’s decision of cutting down the dividend would blow up the company but the same should not be taken out of the proportion.

In respect of this decision, the people that are already drawing pension would not have such an impact. For the people saving for their pensions, it would hit them hard since they are the ones that would suffer in the longer run. The people that would hit hard are the people that are approaching their retirements and they would not have any money that they would be able to convert into money or pension straight away ("corporate law", 2017)

 


The shareholders of the company will be pension funds. Hence, when the company not to pay the dividends, that would harm the investors. The pension funds today only have about 25% of their funds invested in the shares of the UK, which is mainly in the FTSE 100 index. The remaining amount is in the overseas shares and bonds.

The National Association of pension funds indicates that the larger amount of the UK pension industry indicates 1.5% of the money of the members being invested in the company. The shareholders could use the same sort of the rough arithmetic on the income of the dividend. For every, £1 in every £7 of dividend income from FTSE,

About 100 companies comes from BP. the company accounts for about 8% of the total pension fund of UK.

The company is more likely to feature into the wide range of the most popular investments from the FTSE 100 index tracker funds. These are much far away and away from the most popular type of the investment in the shares when it comes to the unit trusts and the funds of the child trusts ("BP crisis: The impact on your savings and investments - BBC News", 2017).

 

References:

7 Biggest Benefits and Drawbacks of Dividend Investing | Wealthy Education. (2017). Wealthy Education. Retrieved 8 May 2017, from https://wealthyeducation.com/benefits-and-drawbacks-of-dividend-investing/

10 Most Important Determinants of Dividend Policy | Financial Management. (2017). YourArticleLibrary.com: The Next Generation Library. Retrieved 8 May 2017, from https://www.yourarticlelibrary.com/financial-management/10-most-important-determinants-of-dividend-policy-financial-management/26237/

17 Factors affecting Dividend Policy: Profitability, Industry, Ownership, etc. (2017). eFinanceManagement. Retrieved 8 May 2017, from https://efinancemanagement.com/dividend-decisions/factors-affecting-dividend-policy

Advantages and Disadvantages of Paying Dividends | Kibin. (2017). Kibin.com. Retrieved 8 May 2017, from https://www.kibin.com/essay-examples/advantages-and-disadvantages-of-paying-dividends-qrmUt36m

Advantages and Disadvantages of Stable Dividend Policy. (2017). Essays, Research Papers and Articles on Business Management. Retrieved 8 May 2017, from https://www.businessmanagementideas.com/financial-management/advantages-and-disadvantages-of-stable-dividend-policy/3992

BP crisis: The impact on your savings and investments - BBC News. (2017). BBC News. Retrieved 8 May 2017, from https://www.bbc.com/news/10293829

BP to Cut its Shareholder Dividend?. (2017). Wealthdaily.com. Retrieved 8 May 2017, from https://www.wealthdaily.com/articles/bp-to-cut-its-shareholder-dividend/2536

corporate law. (2017). Lexisnexis.com. Retrieved 8 May 2017, from https://www.lexisnexis.com/ap/pg/indiacompanieslaw/document/424411/5JMM-V3H1-F0G9-R250-00000-00/Payment_of_dividend_on_preference_shares_overview

Dividend Calendar for May 08, 2017. (2017). NASDAQ.com. Retrieved 8 May 2017, from https://www.nasdaq.com/dividend-stocks/dividend-calendar.aspx

Dividend Payment Factors. (2017). The Finance Base. Retrieved 8 May 2017, from https://thefinancebase.com/dividend-payment-factors-2470.html

Levitt, A., Levitt, A., Roy, T., Roy, T., Bourgi, S., & Levitt, A. et al. (2017). Dividend.com - Dividend Stocks - Ratings, News, and Opinion. Dividend.com. Retrieved 8 May 2017, from https://www.dividend.com/

Mason, J. (2017). Oil spill: BP suspends dividend to pay for $20bn clean-up fund. Telegraph.co.uk. Retrieved 8 May 2017, from https://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7834096/Oil-spill-BP-suspends-dividend-to-pay-for-20bn-clean-up-fund.html

 

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