The Effect of Dividend Pay Out Ratio on the Financial Performance of Companies Listed on the Nairobi Securities Exchange

Abstract

Enhancing shareholders’ wealth and profit making are among the major objectives of a firm. Shareholder’s wealth is mainly influenced by growth in sales, improvement in profit margin, capital investment decisions and capital structure decisions. Studies have shown that there exists a relationship between the dividend payout ratio and firm’s financial performance. The studies undertaken in Kenya on the relationship between dividends payout ratio and financial performance have not attempted to establish why different sectors of the stock exchange behave differently to dividends payout ratios. The purpose of this study therefore, was to establish the effects of dividend payout ratio on financial performance of companies listed in the NSE. A descriptive research design was applied in this study. The population of interest in this study consisted of all the 62 firms quoted in the Nairobi Securities Exchange. In this study emphasis was given to secondary data which was obtained from the financial statements covering the years 2011-2014 for firms that announce dividends. In order to test the relationship between the variables the inferential tests including the regression analysis was used to determine the effect of dividend payout ratio on financial performance. The study found that the three variables contribute to 68.4% of financial performance and that a unit increase in dividend payout ratio leads to a 0.153 increase in financial performance. From the study findings and discussion, the study concludes that dividend payout ratio affect the level of financial performance of companies listed in the NSE. The conclusion is that dividend payout ratio had a positive and significant affect financial performance of companies listed in the NSE for the period of this study. The study recommends that managers should reduce their total debts to increase financial performance of firms and shareholder value. The study also recommends that the management of various companies listed on the NSE take cognizance of the findings in this study as a starting point to understanding how industry factors influence the dividend payout ratios of firm performance. The study further recommends that the companies listed in the NSE should pay more attention to leverage and firm size which influence the financial performance of a firm positively.