The report highlights that dividend policies are influenced by a firm's ability to make payments, earn profits, and maintain its retained earnings. The main purpose of this report is to demonstrate the evaluation of the dividend policy of an organisation and how it affects the shareholder's values. However, the M&M model of divided indicates that there is no relationship between divided policies and the wealth of the investors. The literature section suggests that two types of theories are relevant in the context of explaining dividend policies. The (British American Tobacco) BAT's performance in the last couple of years indicates that BAT is paying off dividends on a quarterly basis, indicating a strong future for its shareholders. The findings of this report indicate that BAT has been able to increase the value of the shares by making adequate strategies which include accumulation of retained earnings and decreasing debts of the organisation.
Examination of dividend policies of an organisation is essential to determine the profitability of investing in the businesses. It can be said that making a complete analysis of the dividend history of an organisation can help an investor decide whether they should invest in the company or not as it refers to the income provided by the company to the investors who have invested money as capital into the business. Therefore, making an evaluation of dividend policy is essential as it demonstrates the management's confidence in terms of business prospects and helps develop trust among the stakeholders, boosting their investment confidence. In order to incorporate this aspect, a well-recognised tobacco manufacturing organisation, British American Tobacco, has been chosen. The main purpose of developing this report is to demonstrate the efficiency of the investment decisions made by the investors for investing in BAT. In this context, to analyse the dividend policy of British American Tobacco (BAT), the company's official website has been used from where the detailed dividend history of the company has been gathered. Three important ratios have been chosen by the analysts that will be implied in this aspect. The dividend policy of BAT has been chosen to analyse because the company's performance improved despite lockdowns and Covid-19 in the year 2020. Also, the company has provided higher dividends, thereby increasing shareholders wealth. Therefore, it is justified to incorporate the company's dividend policy and how it has remained profitable for the investors.
According to Baker et al. (2019), the dividend policy theory refers to the strategy or policy of a company used to distribute a certain portion of the income as a dividend among the shareholders or investors. More specifically, it has also been identified that dividend policy is known as a part of an organisation's strategy to attract investors in making investments. Three types of dividend can be identified; Residual, Constant and Stable.
Olarinde et al. (2019) research show that the company is not obliged to make dividend payments to repay the investment. The researcher also identified that investors of a company could sell their shares to accumulate funds. On that note, the dividend becomes irrelevant, and dividend irrelevance theory can be considered useful. It has been identified by Olarinde et al. (2019), through conducting primary research on the Nigerian firms, that the dividend payout ratio has no impact on the M-M hypothesis, which is based upon the dividend irrelevance theory. The author has also described the dividend preference theory, which depicts that the dividends received in the present time are preferable to dividends that can be received in future. The theory also explains that the dividends are subjected to uncertainty. A positive link between the market value of the shares and dividend payment is observable, which helps in attracting more investors to a company.
The research of Mardiana & Setiyowati (2019) has explained the irrelevance of the dividend aspect thoroughly. The author observed that the dividend irrelevance communicated as an M-M hypothesis as well. The irrelevance of the dividend depicts that it is assumed that in the practical or real-world, the shares' market price significantly impacts the dividends' quoted price (Mardiana & Setiyowati, 2019). Therefore, a relationship between these two factors are observable; however, the theory has identified that the dividend prices or the changes in the dividend will not impact the wealth of the shareholders or investors because the value of the market share and value of an organisation is completely dependent upon the investmen
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