Effect of Dividend Payout Ratio on the Share Prices of the Companies Listed on the Nairobi Securities Exchange

Abstract

As a company earns profits, it can pay it back to investors as dividends or it can retain it within the business for reinvesting. Dividend payout is dependent on lots of factors such as type of industry, trends of profits, taxation policy and liquidity. The main objective of this study was the effect of dividend payout ratio on the share prices of the companies listed on the Nairobi Securities Exchange. The study period was a five-year period from 2013 to 2017. The study involved the use of a descriptive research design using a sample of 60 companies listed on the NSE. Secondary data from the audited financial statements of the listed companies and the NSE's reports on share prices were used. The data collected was systematically organized in a manner that facilitated analysis using the Statistical Package for Social Sciences (SPSS). Data was analyzed on the basis of the mean and the F test statistic was computed at 5% significance by regression analysis. To test the strength of the model and the effect of dividend payout ratio on the share prices of the companies listed on the Nairobi Securities Exchange, the study conducted an Analysis of Variance (ANOVA). From the findings, the F statistic was 3.579 and was found to be significant, dividend policy had a t-value of 3.142 which was significant, capital structure had a t-value of 0.117 which was insignificant, firm size had a t-value of 0.615 which was insignificant and inflation rate had a t-value of -0.662 which was significant. The study concluded that dividend payout ratio affects the share prices of the companies listed on the Nairobi Securities Exchange. The study recommends that companies should pay dividends since they are relevant and they affect the share prices. In addition, dividends are a signal to investors and the market of how the firm is performing. Finally the study recommends the inclusion of the qualitative aspects that are likely to affect the share prices to be included in the model of analysis. This will ensure both the qualitative and quantitative factors are considered in the analysis to ensure the results are more conclusive.