Using Cash flow and Earnings to determine Dividend Payout: Case of KSE-100 Index Companies (Pakistan)

Abstract

Scholars consider the topic of dividends in finance to be of utmost importance due to the inherent duality of the subject matter. The decision of a company to pay dividends has traditionally been studied in the context of its investment and financing choices. Despite decades of research on this topic, it remains one of the most contentious issues in the finance world. It is critical that shareholders are fully informed of the factors that influence dividend payouts since they may impact the company's value.

To understand the factors that affect dividend payouts, a significant amount of research has been carried out. This study analyzes the impact of earnings per share and free cash flow on dividend payouts in Pakistani firms listed on the Pakistan stock market. The study used multiple Ordinary Least Squares (OLS) Regression methods to test and analyze the determinant variables of dividend payouts. Data was collected from the audit financial reports of 50 companies listed on the Pakistan Stock Exchange during the 5-year period from 2011 to 2016, and analyzed using the SPSS program.

The study found that high profitability growth is associated with higher dividend payouts to investors. However, earnings per share did not have a significant effect on dividend per share, despite profitability having a positive effect. On the other hand, cash flow per share had a positive and significant impact on dividend per share.

The results of this study provide investors and decision makers with valuable information to make informed investment choices by analyzing the factors that affect dividend payouts. The study also highlights challenges faced by management, investors, and researchers in evaluating the behavior of firms regarding dividend payment choices.