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The Relationship Between Earnings Per Share and Dividends Per Share of Companies Listed at the Nairobi Securities Exchange

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The Relationship Between Earnings Per Share and Dividends Per Share of Companies Listed at the Nairobi Securities Exchange THE RELATIONSHIP BETWEEN EARNINGS PER SHARE AND DIVIDENDS PER SHARE OF COMPANIES LISTED AT THE NAIROBI SECURITIES EXCHANGE BY COLLINS C. KIBOI A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF SCIENCE (FINANCE), SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI OCTOBER 2015 DECLARATION This is my original work and has never been presented for the award of degree in any other university. Signature……………………………...………. Date……………….. Collins Kiboi Chepsakat D63/67712/2013 This project report has been presented for examination with my approval as the university supervisor. Signature……………………………...………. Date……………….. Dr. Duncan Elly Ochieng’, PhD, CIFA Lecturer, Department of Finance and Accounting School of Business University of Nairobi. ii ACKNOWLEDGEMENTS I thank God for His unceasing love in granting me the opportunity to pursue my MSC degree and the ability to successfully undertake the research. I also express my sincere gratitude to my supervisor, Dr. Duncan Elly, for his invaluable guidance throughout the research work without which it would have been a rocky road to trade on. Finally, I also appreciate the University of Nairobi for the offering a flexible MSC programme to allow even for the employed to fulfill their academic dreams. iii DEDICATION This research work is dedicated to my parents for their support and encouragement throughout my study period and to my wife, Annet Manja Kiboi, for her patience even as I studied deep into the night to see a successful end to the degree. iv TABLE OF CONTENTS DECLARATION ................................................................................................................ ii ACKNOWLEDGEMENTS .............................................................................................. iii DEDICATION ................................................................................................................... iv LIST OF TABLES ........................................................................................................... vii ABBREVIATIONS ......................................................................................................... viii ABSTRACT ....................................................................................................................... ix CHAPTER ONE: INTRODUCTION ............................................................................... 1 1.1 Background of the Study ................................................................................................. 1 1.1.1 Earnings per Share .................................................................................................. 1 1.1.2 Dividends per Share ............................................................................................... 2 1.1.3 Earnings per Share and Dividends per Share ......................................................... 3 1.1.4 Companies Listed at the Nairobi Securities Exchange ........................................... 5 1.2 Research Problem ............................................................................................................ 6 1.3 Research Objective .......................................................................................................... 9 1.4 Importance of the Study .................................................................................................. 9 CHAPTER TWO: LITERATURE REVIEW ................................................................ 10 2.1 Introduction ................................................................................................................... 10 2.2 Theoretical Framework ................................................................................................. 10 2.2.1 The Dividend Irrelevance Theory ........................................................................ 10 2.2.2 The Bird-in-Hand theory ...................................................................................... 11 2.2.3 The Clientele Effect .............................................................................................. 12 2.2.4 The Dividends‟ Signaling Effect .......................................................................... 13 2.2.5 The Tax Differential Theory ................................................................................ 13 2.3 Determinants of Dividend Policy .................................................................................. 15 2.3.1 The Firm‟s Financial Performance ....................................................................... 15 2.3.2 The Firm‟s Leverage ............................................................................................ 15 2.3.3 The firm‟s Growth Prospects and Retained Earnings .......................................... 16 v 2.3.4 The Firm‟s Liquidity ............................................................................................ 17 2.4 Empirical Review .......................................................................................................... 17 2.5 Summary ........................................................................................................................ 23 CHAPTER THREE: RESEARCH METHODOLOGY ................................................ 25 3.1Introduction .................................................................................................................... 25 3.2 Research Design ............................................................................................................ 25 3.3 Target Population of Study and the Sample Size .......................................................... 25 3.4 Data Collection .............................................................................................................. 25 3.5 Data Analysis ................................................................................................................. 26 CHAPTER FOUR: DATA ANALYSIS AND RESULTS ............................................. 28 4.1 Introduction ................................................................................................................... 28 4.2 Descriptive Statistics ..................................................................................................... 28 4.3 Diagnostic and Correlation Analysis ............................................................................. 29 4.4 Earnings per share and Dividends per share .................................................................. 30 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS .... 33 5.1 Introduction ................................................................................................................... 33 5.2 Summary of Findings .................................................................................................... 33 5.3 Conclusions ................................................................................................................... 34 5.4 Limitations of the Study ................................................................................................ 35 5.5 Recommendations ......................................................................................................... 35 5.6 Suggestions for Further Research .................................................................................. 36 REFERENCES .................................................................................................................. 37 APPENDICES ................................................................................................................... 42 Appendix 1: List of Companies Listed at the NSE ...................................................... 42 Appendix 2: Data for Variables in the Study ............................................................... 44 vi LIST OF TABLES Table 4.1: Descriptive Results of the Market ................................................................... 28 Table 4.2: Mean of variables by Industry ......................................................................... 29 Table 4.3: Correlation Matrix ........................................................................................... 29 Table 4.4: Summary Descriptive Statistics ...................................................................... 30 Table 4.5: Effect of EPS on DPS ...................................................................................... 31 vii ABBREVIATIONS CMA Capital Markets Authority DPS Dividend per Share EPS Earnings per Share FRPS Free Reserves per Share IAS international accounting Standards Ltd Limited Company MM Miller &Modigliani NPV Net Present Value NSE Nairobi Securities Exchange OPPS Operating Profits per Share POR Payout Ratio SPSS Statistical Package for the Social Science viii ABSTRACT The relationship between EPS and DPS isn‟t a straight line relationship as the percentage of earnings paid off to the shareholders as dividends isn‟t definite and fixed. The objective of this study was to establish the relationship between EPS and DPS for companies listed at the NSE, the results of which will be of great importance to the companies, the investors, the stock brokers and even the general public in decision making. This study adopted a correlation research design with the population of the study being all the 64 companies listed at the NSE as at December, 31 2014. The sample size was all the 64 companies listed at the NSE but data for only 38 firms was available for the period. A 10- year period during the
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