The relationship between dividend payout and financial performance of firms listed at the Nairobi securities exchange

Abstract

Dividend payout policy is a very important issue in the current business environment for listed companies. This is because dividend policy remains one of the most important financial policies not only from the viewpoint of the company, but also from that of the shareholders, the customers, employees, regulatory bodies and the Government. For a listed company, it is a pivotal policy around which other financial policies rotate. This study sought to determine the relationship between dividend payout and financial performance of firms listed in the Nairobi Securities Exchange. A regression analysis was performed to establish the relationship between dividend payout and firm performance using data derived from the financial statements of listed firms in the Nairobi Securities Exchange. The financial data used for the study covered the period between 2009 and 2013. The explanatory variables included dividend payout which was measured as the ratio of dividend per share dividend and earnings per share. Firm size was the logarithm of total assets of the listed firms. The firms’ leverage was measured as the ratio of total debt divided by the book value of assets of the companies. The findings indicated that dividend payout was a major factor affecting firm performance. The results also showed significant relationships between return on assets, dividend payout, firm’s size and leverage. Based on the findings, the study concluded that for listed firms in Nairobi Securities Exchange, size and leverage do influence the return on assets. The positive association of firm’s size and return on assets indicated that increasing the firm size is associated with an increase in financial performance. The study recommends constant percentage of earnings dividend payout as it creates certainty in the shareholders expectations. The study also recommends that policies and laws governing dividend payment should be strengthened and enforced to ensure compliance in payment by firms in order to increase their market values through share price increases.