Dividend Payout and Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

To determine the correct mix of dividend and retained earnings and how it affects profitability has been a subject in Literature of financial management. This research came in to contribute to the on-going debate by examining the relationship between dividend pay-out and financial performance of manufacturing firms listed in the Nairobi Securities Exchange. The key motivation was to establish if the findings of this study are consistent with prior empirical studies as found in both Signaling and Bird -in-hand hypotheses of dividend policy theory. The target population was the listed manufacturing firms in Kenya as at December 2015. All the ten listed firms at the period were used in the study. The study used secondary data. Annual financial reports for the period 2002-2015 were utilized as the main source of data collection for the 10 firms. Ordinary Least Squares (OLS) was used to estimate the coefficients of explanatory and control variables. Return on Assets (ROA) serves as the dependent variable, profitability, while Dividend Pay-out ratio proxy for dividend policy was the explanatory variable. Control variables include firm size and leverage. The use of descriptive statistics showed that dividend payout ratio -measured as Dividend per Share/ Earnings per Share, had an average of 37.21% and a median of 33.88%. Correlational coefficient findings results imply that the independent variables that is; dividend payout, Firm Size, and Leverage, and the dependent variable -Return on Assets, all had a positive relationship. From the results, there is a clear positive and significant relationship between return on assets and dividend payout. The significance and the positive coefficient of the variable dividend payout indicate that when a listed firm has a policy to pay dividend it influences its level of future financial performance as measured by ROA. The study recommends that policies and laws governing dividend payment should be reinforced and enforced to ensure more frequent payment by firms in order to increase their market values through share price increases.