Own BP? Know Your Rights

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BP seems to be softening its resistance to calls that it cancel its dividend because of the oil spill in the Gulf of Mexico. That seems like a raw deal for shareholders, who had nothing to do with the spill. But is it?

The case is a reminder of where shareholders are in the pecking order — at the bottom. Their rights are pretty limited. If a company goes bankrupt, for example, the shareholders are wiped out while the bondholders may get much of what they are owed.

As an owner, a shareholder has the right to share in the company’s good fortune. If a company’s earnings grow, the share price is likely to go up and the shareholder will profit.

Many companies pay shareholders a portion of their profits as dividends. People who own the stock on the official “record” date have a right to the next dividend payment. But they don’t really have any right to future dividends, because the company can cancel them.

So if BP cancels or postpones its next dividend to conserve cash for spill-related costs, that’s just part of the game — a risk investors need to consider when deciding whether to buy, keep or sell the stock.

As owners, shareholders also share a company’s obligations. If the company has to pay for cleanup or legal judgments, the shareholders will be hurt, even though they had no direct responsibility for the mess.

But there’s a good side to this: the shareholders have no personal liability. Plaintiffs and creditors can go after BP’s assets, but they cannot go after shareholder’s assets such as stocks, bonds, homes and college savings. Owning shares of stock is quite different from owning a corner grocery store, where your other assets could be at risk if a shelf of soup cans collapses on a customer.

This protection from liability is one reason so many of BP's critics want the firm to withhold its dividend. Once the dividend is paid, there’s no way for the company or its creditors to get the money back.

One of BP’s options is to postpone the dividend rather than to cancel it. That way the dividend could eventually be paid if there’s enough cash left after the spill-related costs are paid. But since it could take many years for all those costs to end, investors probably shouldn’t count on ever getting any dividend that is not paid on schedule.

That doesn’t necessarily mean, however, that the loss of a dividend will be costly. The possibility has been in the news for at least a week, so it should be reflected in the share price. Announcing a dividend postponement might not hurt the stock price very much.

The hard-nosed observer would also note that no one is required to be a BP shareholder. If you’re unhappy with the stock, you can get rid of it with a few clicks of a mouse or a call to your broker. Then you could claim a loss on your 2010 tax return, assuming you sell for less than you’d paid.

Many of BP’s current shareholders bought the stock after the spill, meaning they chose to bet that the company would recover and the share price would rebound. In fact, there appear to be a lot of bargain hunters taking this gamble. Recently, trading volume has averaged around 120 million shares a day, compared to an average of around 32 million a day over the past three months. These recent buyers can hardly claim they’ve been blindsided.

Long-time shareholders may indeed be disappointed that the share price has been cut in half.  But investors are not required to make long-term commitments. In fact, the ideal approach is to look at your stock every day and asks, “Would I buy it today, at today’s price?” If the answer is “no,” you should probably get rid of it. Then it won’t matter whether it pays a dividend or not.

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