An Evaluation on the Role of Signalling Effect of Dividends on Future Profits of Companies Listed at the Nairobi Securities Exchange, Kenya

Abstract

Dividend signaling theories give a rationale of reasoning for dividend changes and create hypothesis about the declaration impacts of profits that have been seen in the exact writing. Relationship between current profit payout and future income development is in light of the free income hypothesis. Low profit bringing about low development may be as an after effect of problematic speculation and not as much as perfect activities by directors with overabundance of free money streams available to them. The motivation behind the study was to focus on the evaluation of the role of signaling effect of dividends on future profits of companies listed at the Nairobi Securities Exchange. The study was guided by the following objectives; to determine the effects of dividend payout ratio on company profitability, effects of dividend policy on profitability of companies, effects of company growth opportunities on profitability of companies and effects of firm size on profitability of the companies. The study adopted a stratified simple random sampling design. The target population was 66 companies listed at the NSE. The target population size was made out of 20 of the listed companies randomly chosen from various sectors namely; agricultural, commercial and services, telecommunication and technology, automobiles and accessories, banking, insurance, investment, manufacturing and allied, construction and allied, energy and petroleum. Secondary data was collected from the selected companies' past financial reports between 2004 -2014. The data was analyzed using Statistical Packages for Social Sciences (SPSS) version 21.0 to give means, frequencies and percentages. Regression analysis was used to establish the relationship between dividend signaling effects and future profitability of the companies. Correlation analysis signified a weak statistical relationship between dividend payout ratio and profitability of the companies. The regression results indicated that dividend payout ratio does not significantly predict profitability of companies listed at the NSE. Correlation results indicated positive statistical relationship between dividend policy and profitability of the companies. Regression results indicated that dividend policy significantly predict profitability of the companies therefore affecting profitability of the companies listed at the NSE. There was significantly weaker relationship between company growth opportunities (EPS and DPS) and profitability of companies. Regression results indicated that company growth opportunities do not significantly predict profitability of companies. The results indicated significantly positive relationship between firm size and profitability of companies therefore establishing that it can significantly predict profitability of companies. Dividend payout ratio does not significantly affect profitability of the companies. The study recommends a study on individual firms in the same sector to ascertain the results. Company growth opportunities do not significantly affect profitability of the companies. The study recommends the use of other indicators for growth opportunities to asses' effects of growth opportunity on profitability of companies. The findings can help establish an acceptable dividend policy to various stakeholders in public limited companies in Kenya, to assess dividend trends in the Country and to contribute knowledge in the field of finance and related studies.