The Effect of Dividend Payout Ratio on Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

Financial performance of firms at the Nairobi Stock Exchange has been of essential interest to investors and firm managers. No trader or investor wishes to incur losses. Good financial performance is a primary indicator of the sustenance of a company. This research sought to establish the relationship between dividend payout ratio and financial performance among listed firms in the Nairobi Securities Exchange. All the firms trading at the Nairobi Securities Exchange formed the study population for this study. Twenty three companies were selected three from agricultural sector, five from commercial and services sector, five from financial and investment sector, seven from industrial and allied sectors and three from alternative investment sector. These companies were selected based on availability of data. Correlation was done to establish the type of relationship between the dividend pay-out ratio and the performance of the firms at the Nairobi stock exchange. Multiple regression analysis was carried out to establish the relationship between financial performance as the dependent variable and dividend payout ratio given by dividend per share divided by earnings per share, firm size measured by natural logarithm of market capitalization, tangible assets measured by natural logarithm of tangible assets of the firm and leverage given by total debt divided by shareholders equity as the independent variables. The data was obtained from the Nairobi Securities Exchange and was analyzed using SPSS. The findings indicated that dividend payout ratio was a major factor affecting financial performance. Their relationship was also strong and positive. This therefore showed that dividend policy was relevant. The study recommends that managers designing a dividend policy that will enhance financial performance and therefore shareholders value. Managers should also reduce their total debts to increase financial performance of firms and shareholder value. It can be concluded, based on the findings of this research that dividend policy is relevant and that managers should devote adequate time in designing a dividend policy that will enhance financial performance and therefore shareholder value.