The Efefct of Profitability on Dividend Policy for Manufacturing Companied Listed at the Nairobi Securities Exchange

Abstract

The aim of the study was to investigate the effect of profitability on dividend policy of manufacturing firms listed in NSE. The purpose of the research was to investigate the association between profitability as measured by ROA and dividend policy of the manufacturing firms. Descriptive research design was used in the study and secondary data from the audited financial reports of the manufacturing firms form 2011-2015 were heavily relied on. The study conducted a census of all the firms listed at the NSE. Data collection sheets were used as tools to gather the data and prepare it for data analysis. The data analysis was performed by use of MS Excel and SPSS then presented using tables. From the data analysis, the coefficient of determination was 0.7240. This implies that the predictor variables could explain 72.40% of the adopted study model. Profitability regression coefficient was +0.301. Liquidity had a positive coefficient of 0.012. Earnings have a negative coefficient of -0.053. Firm size had a regression coefficient of +0.39. The p-value for profitability as indicated was 0.02 and the p-value earnings was 0.029 which were <0.05. This implies that profitability and earnings were statistically significant at 5% significance level. Liquidity and firm size have a p-value of 0.791 and 0.63 respectively. Conversely this implies that liquidity and firm size were not statistically significant at 95% confidence level. The table shows that the F-test is 3.282 and the probability is 0.112. The significance is more than 0.05. This means that the there was no statistical significance of the independent variables combined. This also indicates that the null hypothesis should be accepted hence there is no effect of a firm’s profitability on the dividend policy adopted. The results of the correlation analysis indicated that dividend policy is positively correlated with profitability as shown by the correlation coefficient of 0.4263. The results also provide negative correlation coefficients for liquidity, earnings and firm size. This reveals that the dividend policy will increase when the liquidity, earnings and size of the firm declines. The strongest predictor of dividend policy established in the study was profitability with a coefficient of +0.426. This means that when profitability increases, the company’s ability of profit distribution in form of dividends also increases. The study recommends adequate measures to be put into place to improve and grow the profitability of the firms. Profitability growth can be achieved through efficiency measurement of the manufacturing plants. A good way to do this is by calculating how efficiently the plants are converting raw materials into finished products for both the plant as a whole and for individual products. This allows the management to compare themselves with others in the same sector and zero in on strong and weak performers in the product mix. The study also recommends the formation and implementation of a manufacturing commission by the government in addition to the Kenya Association of Manufacturer. The commission will offer industrial sustainability and will involve the politicians in setting up and running the commission. It will also engage in driving new thinking around industrial policy in Kenya. Similar research can be conducted to cover an extended period of more than five years. The study recommends a future research to be conducted using a combination of both macro and microeconomic variables.