The Effect of Dividend Payout Ratio on Share Prices of Non-financial Firms Quoted on the Nairobi Securities Exchange

Abstract

In the commercial world dividends are a critical part of the firm performance as they are a major cash outlay and the major means through which investors receive a return on their investment of shares. Dividends do have informational value which the firms have to safeguard. The cash payment for dividends conveys to shareholders that the company is profitable and financially strong. When a firm changes its dividend pay-out policy in a significant manner, investors take it that it is in response to an expected change in the firm’s profitability, which will last long into the future. An increase in dividend payout signals to shareholders a long-term increase in a company’s expected earnings, cash-flows and general prospects. On the other hand, a dividend cut is usually not a voluntary, planned change in dividend pay-out policy. It usually signals to shareholders that management does not believe the current dividend policy is sustainable. Consequently, expectations of future dividends should generally be revised downwards. Therefore, dividends are an important part of a firm. However, little has been done in Kenya to determine the relationship between dividend payouts and share prices at the NSE. Therefore, this study sought to find out the effect of dividend payout ratio on share prices of nonfinancial firms quoted on the NSE. The study adopted a descriptive research design targeting secondary data collected from NSE for all the non-financial trading companies listed in NSE, which informed the study. The study found that that dividend payout ratio affects the share prices of non-financial firms quoted in NSE. This study therefore 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. It also recommends that further research should be done on dividend payout ratio effects on the share prices of listed financial institutions in the NSE so as to determine whether similar findings can be realized from the sector to enhance the study’s findings.