Factors Considered in Dividend Payout Decisions – The Case For Listed Companies in Kenya

Abstract

The dividend decision is one of the fundamental financial decisions in the management of a firm. To most investors, the value of an investment is assessed primarily on the basis of returns received usually in form of dividend and interest. Thus, a firm’s dividend decision carries significant information value to investors.

On the other hand, the expanding investment market in Kenya has placed an increased challenge on managers to accumulate sufficient funds for growth. This situation has further limited managers’ discretion on the dividend payment. A balance between the various competing interests is critical for sustainable growth of a firm.

Considering that quoted companies in Kenya enjoy public trust and investor confidence due to the stringent governance and reporting requirements, which in most cases are reflected in the positive earnings and growth that they generate for their shareholders, it would be useful to study the key factors that drive their dividend policies. These considerations may be replicated in other firms and sectors so that they too may achieve sustainable growth while addressing the needs of their diversified investors.

This study therefore seeks to examine the factors considered by management of quoted companies in Kenya in determining the dividend payout ratios. The study goes further to assess whether the ranking of these factors is influenced by the nature of industry, size and age of a company.

The research is exploratory in nature and adopts a survey approach. For this purpose, primary data is obtained through a questionnaire administered on the management of the companies while secondary data is obtained from published financial statements over an eight year period from January 1998 to December 2005. The results indicate that the current and future profitability of a company, the cash flow position, the financing requirements and the availability of profitable investments, in that order are the main considerations in the dividend payout decision of a firm. On the other hand, the size of a firm, the number of years of operation (age) and the nature of the industry do not significantly affect a company’s dividend policy in relation to payout.

Keywords: Dividends, payout, determinants, dividend theories, Nairobi Securities Exchange.