The effects of dividend policy on profitability of Sacco’s with FOSAs in Kenya

Abstract

For SACCOs to be able to meet the capital adequacy requirements, they may opt to adopt dividend reinvestment plans (DRIPS) rather than cash dividend payment plan. It is expected that most members will join SACCOs which have been profitable due to their going concern basis. It is therefore evident that a positive relationship exists between profitability and institutional ownership. However, there is limited evidence that investors prefer to invest in profitable firms. They found that profitability, usually measured as the return on equity (RoE) is negatively related to average shares held by institutional investors. The purpose of the study was to establish the effects of dividend policy on profitability of SACCOs with FOSAs in Kenya. A descriptive research design was employed in this study. The target population was SACCOs operating FOSAs in Kenya and the population was taken from the SASRA website on random basis. The study focused on thirty (30) SACCOs that has been licensed by SASRA. Secondary data was collected using the financial statements of the SACCOs sampled for the last five years. Regression model was used to establish the causal relationship between two variables, that is, a dependent (Dividend decisions) and an independent variable (profitability). From the above regression models for the five years, the study found out that the facets of dividend policy (dividend yield and dividend payout) affect the profitability of SACCOs. They either influenced it positively or negatively. The study also found out that the coefficient of SACCOs dividend yield varied from positive to negative. The study found out that the companies dividend payout varied in value although it was positive in most cases except for 2009. The study concluded that there is a positive relationship between dividend policy and the profitability of SACCOs with FOSAs in Kenya. The study recommends constant percentage of earnings dividend policy as it creates certainty in the shareholders expectations. The study also recommends that shareholders should also understand that, when a SACCO has unfavorable dividend payout ratio; it is due to either bad profits or investment in growth opportunity.