Effect of Free Cash Flows on Dividend Payout Among Commercial and Services Firms Listed at the Nairobi Securities Exchange

Abstract

Corporate finance literature shows that a company's dividend payout strategy as free cash flows can be used to finance investments and pay dividend. However, dividend payout decision remains a contentious corporate finance topic, as it needs to balance contradictory interests between shareholders and managers. In Kenya, NSE provides an excellent platform for international and local investors seeking to get access to the Kenyan market. Thus, as a requirement for a firm to be quoted at the bourse it ought to have well-outlined future dividends pay out strategy that will make dividends payout a key consideration for any entity intending to be listed. However, most companies under the commercial and services sector have not met their wishes, resulting in limited investment in the sector. In addition, the distribution of profits by the firms under the sector is low and uncertain. Further, there are a number of corporations listed under the commercial and services segment that failed to pay dividends in the past because of cash flow related imperatives. This research aims at examining how organization free cash flows affects dividend payout ratio among service and commercial enterprises listed at the Nairobi Stock Exchange. The agency theory, Miller and Modigliani dividend irrelevance theory and free cash flows theory formed the theoretical basis for this study. The survey employed a descriptive study strategy and the research’s population covered the 13 commercial and services firms quoted at the NSE as at 31st December 2021. The paper used secondary data that was gathered via the collection data sheet for a period of 5 years (2017 -2021) and was obtained from the quoted commercial and services companies published financial statements and annual audited reports. Through the SPSS software, the descriptive and inferential statistics were adopted for the analysis of data. Inferential statistics entailed correlation and regression analysis. The research outcomes documented that free cash flows (FCF) had a positive and significant impact on dividend payout while profitability had a direct and significant relationship on the DPR respectively. Further, the results also documented that firm size had a negative and insignificant impact on DPR while firm age had a negative and significant impact on DPR respectively. This survey revealed that free cash flows, profitability and firm age significantly influence listed commercial and service company’s dividend payout. This research recommended that that the executives of the quoted commercial and services firms should utilize the available free cash flows to increase the corporations’ investments or distribute them as dividends to shareholders instead of investing in projects with negative NPVs.