The effect of profitability on dividend policy of commercial Banks in Kenya

Abstract

Dividend policy has been analyzed for many decades and it refers to the issue of how much of the total profit a firm should pay to its stockholders and how much to retain for investment so that the combined present and future benefits maximize the wealth of stockholders. It summarizes the information from other researchers who have carried out their research in the same area of dividend policy and firm value. The study period was a six year period i.e. 2009-2014. This study analyzed the relationship between profits and dividend policy of commercial banks in Kenya. The study involved the use of a descriptive research design using 27 out of the 44 commercial banks registered in Kenya. The study employed secondary data. This study found that there was a significant relationship between dividend policy and the profitability of commercial banks. All the dependent variables (profitability, liquidity, and inflation) had a significant impact on the value of the banks since their p-value was less than the accepted critical value. Correlation coefficient was also used to determine the relationship between the variables and concluded that dividend policy had a positive correlation with the profitability of the firm. The other variables had also a positive correlation with the value of the firm but however the study found out that the strength of the relationship reduced when the two control variables (liquidity and rate of inflation) were incorporated in the study. The study recommends that since profitability has an effect on the dividend policy of commercial banks, companies should pay dividends to maintain a high firm value. In carrying out the dividend payout decision, the management should also consider other factors such as, growth opportunities and current ratio since they have an impact on the value of the firm. In addition to the above this study recommends diligence in the handling of dividend payout information among the sector players in a bid to ensure that there is inclusivity of the stock market stakeholders. Therefore, policies guiding the sharing of this information should be availed to enhance market control.