The relationship between profits and dividend payout of commercial banks in Kenya

Abstract

This study analyzed the relationship between profits and dividend payout of commercial banks in Kenya. The research objective was to investigate the nature of relationship between dividend payout and profits of commercial banks in Kenya. The result assists in the understanding of how profits influence commercial banks’ dividend payout. Commercial banks can then make use of such information to implement a dividend payout policy which satisfies their shareholders expectation. Two control variables i.e. liquidity position (measured by cash and balances with CBK) and inflation rate (at year end) were also studied to find out the impact they have on the relationship established between profits and dividend payout. The research was based on the commercial banks consistently listed at the NSE for the five-year period from 2008 to 2012 inclusive. Data on listed commercial banks is readily available and regarded credible for use. For the analysis of data from the ten commercial banks, simple and multiple linear regressions were used to determine the relationship between dividend payout and profits and also the two control variables, liquidity position and inflation rate. The key finding of the study is that there is a strong positive relationship between profits and dividend payout. However the study found out that the strength of the relationship reduced when the two control variables were incorporated in the study. The conclusion from the study was that profits and dividend payout of commercial banks are positively correlated and that a strong positive relationship exists between the two variables. This study is consistent with empirical findings of Abdi (2010) who concluded that dividend payout positively correlate with future profits of companies though the relationship is low.