The Relationship Between Dividend Payout and Financial Performance: a Study of Listed Companies in Kenya

Abstract

Successful companies earn income. This income can kept in the company (spent or re-invested), pay off liabilities, pay dividends or used to repurchase shares. Issues that arise if a company decides to distribute its income to shareholders include the proportion to which such income would be distributed to shareholders; whether the distribution should be as cash dividends or cash buying back some shares and how stable the distribution should be. Many reasons exist why companies should pay or not pay dividends. Yet figuring out why companies pay dividends and investors pay attention to dividend is one of the many dividend puzzle which is still problematic and this study is trying to bleach the gap that exists by analyzing the importance of setting corporate dividend policy and the relationship that exist between dividend payout and the financial performance variables. The research study adopted a descriptive research design. This design fitted the proposed study which aimed at determining the relationship between dividend payout and the following four financial performance variables namely; profitability, sales growth, cash flow and market to book value. To achieve these objective thirty financial statements of listed companies was analyzed. The research also advanced the work of previous scholars and academicians. Based on this research the results showed that there was a positive relationship between dividend payout and profitability, liquidity and a negative relationship exist between dividend payout and the following financial performance variables, sales growth and market to book value. This study recommends that firm managers should plan on the proportion of profits that should be retained versus the portion that will be distributed as dividends to stockholders. Managers are also rated on financial performance hence the findings of this study will be of great benefit to them and will also act as a guide to setting reliable corporate dividend policies.