Effect of Dividend Policy on Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Due to the Information Value of the dividends, dividends are considered significant in the firms. Any change in dividend policy implies that it is as a result of the profitability of the company and is expected to last for long in the future. When a company increases its dividend payout, it is a good signal of the company’s expected increase in the earnings.The purpose of this research was todetermine the effect of dividend policy on the financial performance ofthe commercial banks listed at Nairobi securities exchange. The research used secondary data which was obtained from the Capital Markets Authority (CMA) and from the financial statements in the websites of the listed commercial banks due to its availability. Data was collected for a five year period from 2013 to 2017. Data collected included; total assets, net income, total capital, total loans, total customer deposits, total liabilities, total dividends and total number of shares outstanding. Dividend payout ratio, interest rates, leverage, liquidity, capital adequacy, firm size and return on assets were the study variables. The research was a census study and it adopted a descriptive design. This design fitted the study that aimed to determine the association between dividend policy and financial performance variables (Dividend Payout ratio, interest rates, leverage, liquidity, capital adequacy and firm size).Regression analysis was used to show the effect of dividend payout ratio, interest rates, leverage, liquidity, capital adequacy and firm size on the financial performance and correlation analysis was employed to determine the association of the factors in the model. Data was analyzed on the basis of the mean and the F test statistic was computed at 5% significance level and an Analysis of Variance (ANOVA).The study established that thefive independent variables explained 17.2% of variability on the financial performance of the listed commercial banks which was represented by adjusted R2. The study therefore concluded that dividend policy affects the financial performance of the commercial banks listed at the Nairobi securities exchange. The study findings further confirmed a positive relationship between dividend payout ratio and financial performance. Increase in dividend payout ratio encourages the investors in investing more assets due to the increased returns. A firm paying high amount of dividends signifies high performance of the firm. Liquidity was confirmed to be a major determinant of the profitability and performance; therefore it is recommended that entities should maintain their liquidity since it was confirmed to be positively related to financial performance.Finally, the study recommends for an investigation on dividend policies adopted by local and foreign investment firms and how they affect their financial performance. This will help in determining the differences in their performance over the years.