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CHAPTER ONE

1.0 INTRODUCTION

1.1Background to the Study

Dividend Policy refers to the explicit or implicit decision of the Board of Directors

regarding the amount of residual earnings (past or present) that should be distributed

to the shareholders of the corporation (Gibson 2009). It is “the practice that

management follows in making dividend payout decisions or, in other words, the size

and pattern of cash distributions over time to shareholders” (Lease et al. 2000). This

decision is considered one of the vital financing decisions because the profit of the

corporation is an important source of financing available to the firm.

Dividend policy is one of the most debated topics and a core theory of corporate

finance which still keeps its prominent place. Almost three decades ago Black (1976)

described it as a “puzzle”, and since then an enormous amount of research has

occurred trying to solve the dividend puzzle. Allen et al (2000) summarized the

current consensus view when they concluded “Although a number of theories have

been put forward in the literature to explain their pervasive presence, dividends

remain one of the thorniest puzzles in corporate finance”.

The issue of dividend has attracted the attention of academicians and researchers.

Also Black (1976) stated that “The harder we look at the dividend picture, the more

it seems like a puzzle, with pieces that don’t fit together”. It is among of top ten
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unresolved problems in the finance literature and we have not an adequate

explanation for the observed dividend behavior of the firms Black (1976), Allen and

Michaely (2003) and Brealey and Myers (2005), (2003). Dividend payout policy

plays an important major role to manufacturing companies’ decision making. Parallel

with other decisions, Management should consider dividend policy decisions because

if a firm decides to pay more dividends, it retains fewer funds for investment

purposes, and the company may be forced to revert to capital markets to gain funds

(Baker and Powell (2000).

In developed economies, the decision whether paying dividends or keep as retained

earnings has been taken very carefully by both investors and the management of the

firm (Glen et al. 1995). Many studies such as Linter 1956, Miller & Modigliani

1961, Feldstein & Green (1983), Baker and Powell (2000), (2001), regarding the

dividend policy has been done and provided empirical evidence regarding the

determinants of dividend policy. Yet, there is no indisputable explanation on what

factors influence the dividend policy. The question of why firms pay dividends from

their earnings still remains unexplained. This is known as the dividend puzzle in

finance literature (Alam Khan, 2009). Many hypotheses have been drawn to shed

some light on this puzzle but the problem still exists.

Ever since the work of John Lintner (1956), followed by the work of Miller and

Modigliani (1961), dividend policy remains a controversial issue. Some of the

questions that remain unanswered include; what are the factors that determine

dividend policy? Is dividend policy determined dependently or independently?

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Among a number of researchers, Kania & Bacon (2005), Al-Malkawi(2007), Gill, et

al. (2009) found dividend payout are the function of firm’s profitability,while Anil &

Kapoor (2008) found Liquidity to be noteworthy determinants.

In the real world to determine the appropriate payout policy it is often a difficult task

of balancing many conflicting forces. The important elements are not difficult to

identify but the interactions between those elements are complex and no easy answer

exists Ross (2009). And because of that Allen and Michaely (1995) drew the

following conclusion; Much more empirical and theoretical research on the subject

of dividends is required before a consensus can be reached Allen and Michaely

(1995). Researchers have primarily focused on developed markets; however,

additional insight into the dividend policy debate can be gained by an examination of

developing countries, like Tanzania which is currently lacking in the literature and no

any a single study has be established to solve dividend puzzle in Tanzania. This study

intended to find out determinants of dividends payout policy for manufacturing listed

companies in Dar es Salaam stock exchange (DSE) and to check if the possible

determinants identified in the theoretical and empirical literature hold in a developing

stock exchange like DSE or the determinants of Dividend Payout are more puzzling

as well as serve as a guide to directors of manufacturing companies when fixing

dividends.

1.2 Statement of the Research Problem

Despite of voluminous amount of research, we still do not have all answers to the

dividend puzzle Baker et al (2002). Allen et al. (2000) concluded “Although a

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number of theories have been put forward in the literature to explain their pervasive

presence, dividends remain one of the thorniest puzzles in corporate finance”. There

are many researches done on the subject of dividend policy for many countries but

the actual motivation of dividend decision still remains unsolved in corporate finance

and further research is crucial in order to increase the understanding of the subject

Baker & Powell (1999).Therefore lack of conclusive consensus solution for the

subject of dividend policy, result many researchers continuing to conduct study on

this field in order to obtain a strong theoretical and empirical analysis on dividend

and solve this dividend puzzle.

Dividend payout policy for manufacturing companies listed at DSE differ as each

company decides on what, how and when to pay dividend to its shareholder. Some

company pay higher and other pay less dividend although operate under same

business environment. The questions how do the manufacturing companies set their

dividend and why do firms pay dividend impose the problem in dividend payout in

Tanzania context. These reveal that there is no unified picture regarding dividend

payout policy and remain one of the most debated issues within the field of corporate

finance.

This also could be justified in line with the fact that there are so many factors

influence dividend policy and no any law subject a company to pay a certain percent

of its net profit after tax as a dividend to its shareholder in Tanzania. Hence from the

study of Bhattacharyya (2007), concluded that dividend policy remains a

puzzle.Brealey et al, (2008) argued that even if numerous researchers have attempted
 5

to solve the “dividend puzzle” identified in Black (1976), but these studies have not

yet arrived at an unequivocal solution. Moreover when referring to the prior

empirical studies on dividend policy, most of the researches have been conducted

mainly on U.S. firms, developed countries, emerged market, Asia and western Africa

but hardly there is no any evidence has been established from Tanzania context. So

there is a need to examine the determinants which influence the dividend payout

decision for manufacturing companies listed at DSE, which may offer further

insights for significant factors to be considered.

This study sought to find answers to the following research questions.

a) Does profitability have positive and significant impact on dividend payout

policy of listed Tanzanian manufacturing firms?

b) Does Liquidity have positive and significant impact on dividend payout

policy of listed Tanzanian manufacturing firms?

c) Does Growth have negative and significant impact on dividend payout policy

of listed Tanzanian manufacturing firms?

d) Does Firm size have positive and significant impact on dividend payout

policy of listed Tanzanian manufacturing firms?

e) Does Leverage have negative and significant impact on dividend payout

policy of listed Tanzanian manufacturing firms?

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1.3 Research Objectives

1.3.1 General Objectives

The main purpose of this study is to examine determinants of dividend payout policy

for manufacturing companies listed at DSE.

1.3.2 Specific Objectives

a) To examine whether profitability has a positive and significant impact on

dividend payout policy for the manufacturing companies listed at DSE.

b) To ascertain whether liquidity has a positive and significant impact on dividend

payout policy for the manufacturing companies listed at DSE.

c) To examine if growth has a negative and significant impact on dividend payout

policy for manufacturing companies listed at DSE.

d) To examine whether firm size has a positive and significant impact on dividend

payout policy for manufacturing companies listed at DSE.

e) To examine whether leverage has a negative and significant impact on dividend

payout policy for manufacturing companies listed at DSE.

1.4 Significance of the Study

The study is significant in a number of ways. Firstly, to shade light on how corporate

manager should decide on the dividend policy and what should be considered before

they make any decision. The sound dividend policy is very important since a high

and regular corporate dividend policy decided by corporate management would

create a benchmark for doing well and therefore more dividends can be distributed to

shareholders while maintaining the overall health of the company.

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Secondly, the study offers a significant contribution to existing theoretical and

empirical knowledge regarding determinants of dividend payout.

Finally, the study may serve as a reference and basis for further research on

determinants of dividend payout policy behavior in developing countries.

1.5 Organization of the Study

The research report is organized in to five chapters. Chapter one explains

introduction part. Chapter two presents reviews of literature. Chapter three describes

the research methodology used to carry out the study. Chapter four provides findings

and discussion on the findings. Finally, Chapter five brings to an end the research

with conclusion.
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CHAPTER TWO

2.0 LITERATURE REVIEW AND THEORIES

2.1 Introduction

The objective of this chapter is review the literature on dividend payout policy. The

chapter is structured as follows after this introductory section: section 2.2 provides

the meaning dividend policy while section 2.3 gives a reflections on the development

of DSE in section 2.4 the theoretical literature is reviewed, and section 2.5 reviews

the empirical literature on the determinant of dividend payout, section 2.6 identifies

research gap, then section 2.7 provides adopted research conceptual framework and

finally with section 2.8 Summarizes the chapter.

2.2 Meaning of Dividend Policy

In discussing the meaning of dividend policy, it is important to highlight what a

dividend is. Dividend is simply the money that a company pays out to its

shareholders from the profits it has made Droughty (2000). Such payments can be

made in cash or by issuing of additional shares as in script dividend. Davies and

Pain (2002) however defined it as the amount payable to shareholders from profit or

distributable reserves.

According to the Ross, Wester field and Jordan (2008), dividend can be defined as

cash paid out from current or accumulated retained earnings rather than other

sources. Also Pandey (1979) defines dividend as that portion of a company’s net

earnings which the directors recommend to be distributed to shareholders in

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proportion to their share holdings in the company. Companies that are listed in the

stock exchange are usually pay out dividends on a quarterly or semiannual basis.

The semiannual or quarterly payment is referred to as the interim dividend. The

final payment, which is usually paid at the end of the financial year of the company,

is known as the final dividend. Dividends are normally paid after the corporate tax

has been deducted. This payment of dividend to shareholders depends on the

company management’s willingness to distribute their surplus from their net income

to shareholders or to retain it for other re-investment opportunities.

2.3 Reflections on the Development of the DSE

2.3.1 Establishment of the DSE

The Dar es Salaam Stock Exchange (DSE) was established by the Capital Markets

and Securities Authority under the Capital Markets and Securities Act of 1994. The

DSE was incorporated in September, 1996 as a Company limited by guarantee

without a share capital under the company’s ordinance (Cap. 212) (DSE 2008). The

DSE is therefore a non-profit making body created to facilitate the Government

implementation for the economic reform sand in future to encourage the wider share

ownership of privatized and all the companies in Tanzania and facilitate raising of

medium and long-term capital.

The establishment of the DSE followed the enactment of the Capital Markets and

Securities Act, 1994 and the establishment of the Capital Markets and Securities

Authority (CMSA), the industry regulatory body charged with the mandate of

promoting conditions for the development of capital markets in Tanzania and

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regulating the industry. The DSE has made several rules which are found in a book

popularly known within the industry as DSE Blue print.

2.3.2 Operations and Performance

Even though the DSE was incorporated in September 1996, trading has not started

until 15th April 1998 with the listing of the first company, Tanzania Oxygen Limited

(TOL). The Dar es Salaam Stock Exchange is a stock exchange located in Dar es

Salaam, the largest city in Tanzania and has seven (7) Stockbrokerage firms, licensed

to deal on exchange. DSE is a member of the African Stock Exchanges Association

and IOSCO. The activities of the exchange are monitored and supervised by the

Capital Markets and Securities Authority (CMSA). The DSE operates in close

association with the Nairobi Securities Exchange in Kenya and the Uganda Securities

Exchange in Uganda.

The DSE performing the following duties which are as follows; firstly Privatization,

DSE was introduced to assist the privatization initiatives undertaken by the

government that was divesting of some the parastatal companies that eventually went

through the DSE. Secondly Financial Market, DSE was established for the purpose

of facilitating all financial trading operations activities i.e. capital markets and money

markets. (Long and short term securities).Thirdly Facilitatation of Capital, DSE

Company established to mobilize and direct resources to productive sectors of the

economy. It acts as a source of cheap capital for the private sector to finance long

term investment. It offers a relatively convenient and an alternative access to capital

in comparison to the traditional financial instrument such as bank loans. Finally, DSE
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acts as a Linkage; It is a bridge between Investors (Surplus/saver unit) and the

Issuer/Company (deficit unit) of a Capital. Savers and Issuers meet together through

brokers who charge commissions both sides.

2.3.3 Objectives and Functions

The DSE play the following roles like many other emerging capital markets. The first

function is to provide a market for listed securities. Specifically, it was created to

enable those who wish to join or exit the market to do so efficiently. This role ensures

liquidity in the secondary market. The second function of DSE is to facilitate price

discovery. Demand and supply forces together with an efficient information

processing mechanism will ensure that buyers and sellers of securities transact at fair

prices. The third role of DSE is to facilitate transparency. Disclosure requirements

put in place by the DSE require listed companies to promptly disclose all price

sensitive information so that investors may make informed decisions.

The fourth role of the market is to facilitate privatization and wider ownership of

resources. The market has facilitated and continues to facilitate privatizations of

parastatal organizations which were previously under the control of the Government.

The other function of DSE is to facilitate raising of capital by firms. These

companies are able to sell new securities at prices which lower the cost of capital and

improve their chances of increasing operating profits. Creation of wealth through

investing in listed securities is also a function of DSE. In real terms, all listed

securities at DSE have generally performed well compared to bank deposits. The last
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function of DSE is to contribute to the cultural transformation of Tanzanians. This is

mainly a knowledge revolution geared towards educating Tanzanians on issues

related to stock market operations. This exercise has contributed substantially

towards public enlightenment which has caused some Tanzanians to invest in listed

companies as a result of the said transformation.

Finally, with effect from 15th December 2006, trading has been conducted at the

DSE trading floor through an Automated Trading System (ATS).This is an electronic

system which matches bids and offers using an electronic matching engine.

Currently, the ATS operates on a local area network (LAN) but the exchange plans to

extend operations to a wide area network (WAN) which can be accessed by brokers

even out of Dar es Salaam.

2.3.4 Dividend Policy Issues

For the time being there is no uniform guidelines from DSE as far as Dividend

payout policy concerned, but only policies exist are those which have been described

in the prospectus of each listed company as follows;

2.3.4.1 TATEPA

The dividends are payable within 60 days of approval by the shareholder at the

annual general meeting. The dividend policy is to distribute at least 50% of

attributable earnings to shareholders, however the directors will continue to review

the company’s dividend policy from time to time in light of the prevailing

circumstances at such time.

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2.3.4.2 TCC

The dividends are declared and payable by prior recommendation of the Board and

later approval in the general meeting. The Board may, prior to recommending any

dividend, set aside out of the profits of the Company such sums as it thinks proper as

a reserve and the Board may also, without placing such sums to reserve, carry

forward any profits, it thinks prudent not to distribute. Dividends may be paid by

cheque or warrant or a similar instrument to shareholders registered at the DSE at the

date announced through public notice. The declaration can be interim or special or

final ordinary dividends. Finally, the proposed dividend is net of withholding tax.

2.3.4.3 TWIGA

The Company in general meeting may declare dividends, but no dividends shall

exceed the amount recommended by the directors and no dividends or interim

dividends shall be paid otherwise than in accordance with the provisions of the Act.

The directors may from time to time pay to the members such interim dividends as

appear to the directors to be justified by the profits of the company and any dividend

unclaimed after a period of seven years from the date of declaration of such dividend

shall be forfeited and shall revert to the company.

2.3.4.4 SIMBA

The dividends are payable out of profits, therefore the profits of the company

available for dividend and resolved to be distributed in respect of any financial year

or other period for which the company’s accounts are made up and submitted to the

company in general meeting shall be apportioned and paid to the members according
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to the amounts paid on the shares held by them on the date of declaration. Hence no

dividend shall be payable except out of the profits of the company, or in excess of the

amount recommended by the directors.

2.3.4.5 TBL

All dividends shall be declared at the general meeting and once declared may be

invested or otherwise shall be apportioned and paid pro rata according to the amounts

paid or credited as paid on the shares. Therefore no dividends shall be paid otherwise

than out of profits, neither shall it bear interest against the company.

2.4 Determinants of Dividend Payout Policy: Theoretical Consideration

The literature currently advances main theories purporting to explain the

determinants of dividend payout policy, each of which centers on the idea of

dividend theory the financial literatures documents over time and offers an abundant

amount of information and research on the matter. There are several theories as to

why firms should pay dividends or not. These theories include the dividend

irrelevancy theory, bird- in- hand theory, signalling theory, agency theory, tax

preference and clientele effect In the following paragraphs these theories have been

discussed as follows;

2.4.1 Dividend Irrelevancy Theory

The dividend irrelevancy theory proposed by Miller and Modigliani (1961), argues

that in a perfect market; one with independence of investment and dividend policies

of firms, perfect capital markets, no taxes, perfect information, no transaction or

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flotation cost, markets are complete and no agency costs or contracting cost

associated with stock ownership dividend payments will not affect firm value.

Modigliani & Miller,(1961) put forward the irrelevance theorems more commonly

known as the MM theorems and argued that dividend policy has no effect on either

the price of a firm’s stock or its cost of capital. If dividend policy has no significant

effects, then it would be irrelevant. The reason is that in the presence of perfect

marked conditions, investors can create their own dividends without cost. If investors

want a dividend they can simply sell off some of their shares. Equally if investors are

paid a dividend, which they do not want, they can merely use the dividend to

purchase additional shares in the firm. So if investors can create their own dividend

policy without incurring extra costs, dividends are indeed irrelevant.

However the irrelevancy theory only holds, in such a perfect market, in which these

seven assumptions hold. Nevertheless markets are not perfect and taxes and

transaction costs do exist. Even so this does not make the theory less important. The

dividend irrelevance theory supplies a framework through which one can test the

implications of a violation of any of the assumptions. Various theories have been

developed with the relaxation of MM assumptions. The theories had with main

objective to explain why companies pay dividends. Black (1976) argued that there

may be infinite reasons of paying dividends and posed the question,’ if dividends are

irrelevant, why do corporations pay dividends’ and ‘why investors’ pay attention to

dividends’. He emphasized that companies pay dividends as a means of rewarding

existing shareholders but the main argument was that dividends were paid so that the

company is seen as a worthwhile investment.

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2.4.2 Bird in the Hand Theory (Dividends Preference)

According to the bird-in-the-hand theory, which criticized Miller and Modigliani’s

paper explains that investors prefer dividends (certain) to retained earnings. This

proposed by Gordon (1959,1963) and Lintner (1956, 1962), if all other factors are

equal, investors prefer dividends to capital gains because they perceive dividends

today as a certain cash flow, as opposed to capital gains in the future which are

uncertain.

The name “bird in hand” is the umbrella term for all studies that argues that

dividends are positively correlated to the company’s value, hence company value act

as a motivating factor for the payment of dividend. It is based on the expression that

“a bird in the hand is worth more than two in the bush”. Expressed in financial terms

the theory says that investors are more willing to invest in stocks that pay current

dividend rather than to invest in stocks that retain earnings and pay dividends in the

future. They argue that the combined value of dividends and capital gains diminish

when dividend payout ratio increases. When a firm increases its payout ratio,

investors become concerned that the firm’s future capital gains will diminish, since

the retained earnings that the firm reinvests into the business is reduced. Whether or

not dividends are more certain, will be left uncommented and in this case it is not

important. The important thing is that investors often believe that they are, such that

it influences their preferences towards dividends. Moreover when making dividend

payouts, the firm gets a higher rating from rating agencies as compared to a firm not

making any dividend payout. With a better rating, the firm will be able to raise

finance more easily from capital markets since credit institutions will be willing to
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give loans to the firm since the payout of dividends shows that the firm has the

ability to meet its obligations. Moreover, in some cases, the firm will be able to

borrow at preferential rates and enjoy better facilities. Gordon (1963) further argues

that firms making dividend payouts tend to have an increase in the value of the firm.

2.4.3 Tax Preference and Clientele Theory

Given the nature of dividend payouts, it makes most sense if only a few or no firms

paid out dividends at all. When compared to other means of distributing wealth to

shareholders, dividends are more costly in the majority of countries since they are

taxed at a higher rate. Because of these taxes, investors cannot create their own

dividend policy without inflicting additional cost, and because the tax rate is higher

on dividends than on capital gains, most investors are better off without dividends.

Normally most investors pay higher taxes on dividends than on capital gains,

however depending on which type of investor is considered, there is a separation into

different tax brackets. Some investors have low marginal tax rates or are completely

tax exempt. Such investors are typically large institutional investors as insurance

funds, and pension funds. Because of these different tax implications for different

types of investors a tax clientele effect may arise, some showing preferences for

dividends and some for capital gains depending on what maximizes their value.

Because dividends normally suffer from tax disadvantages, investors with a low

marginal tax rate are expected to invest in high dividend yielding stocks and vice

versa. Elton and Gruber (1970), and Barclay (1987) suggested that the clientele effect

does indeed exist. Conversely, Miller and Scholes (1978) argued against clientele
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effects by showing that tax differences between dividends and capital gains can be

neutralized by simply levering the portfolio.

An investor in a high tax bracket would prefer to invest in stock giving a low rate of

return so as to pay less tax. On the other hand, an investor in a low tax bracket would

definitely invest in stocks with higher returns as he currently does not have a large

tax liability. Pettit (1977) showed that older investors (retired persons) were more

likely to hold high dividend shares because they pay lower income tax. In this case

we call it the tax clientele effect. Hence the clientele effect refers to firms making

their dividend policy decision based the customers they would like to attach to

themselves Litzenberger and Ramasawmy (1979).Brigham and Houston (2004)

avowed as stockholders can switch firms based on their specific dividend preference

a firm can change from one dividend payout policy to another and then let

stockholders who do not like the new policy sell to other investors who do. However,

frequent switching would be inefficient due to some constraints brokerage costs, the

likelihood that stockholders who are selling will have to pay capital gains taxes, and

a possible shortage of investors who like the firm’s newly adopted dividend policy.

Thus, management should be hesitant to change its dividend policy, because a

change might cause current shareholders to sell their stock, forcing the stock price

down. Such a price decline might be temporary, but it might also be permanent

So the existence of a clientele effect does not necessarily imply that one dividend

policy is better than any other. May be wrong, though, and neither they nor anyone

else can prove that the aggregate makeup of investors permits firms to disregard
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clientele effects. This issue, like most others in the dividend arena, is still up in the

air Brealey and Meyers (2003).

2.4.4 Signaling Theory

The signaling theory implies that investors partially base their assumptions of future

cash flows of a firm on signals sent from that firm. It revealed that information

asymmetry between managers and outside shareholders allows managers to use

dividends as a tool to signal private information about a firm’s performance to

outsiders. Management will not increase the dividends unless they certain about the

future earning to meet the increase in dividends. And conversely dividend cuts are

perceived as "bad news" if the firms reduce dividends, it sends to investors a

negative message that future earning will be less than current Miller

(1980).According to Signalling theory, managers have inside information about a

firm that they cannot, or do not wish to pass on to the shareholders, for example,

better estimates of future earnings. Corporate dividends are considered to be

management’s most cost-effective way of reducing the investor uncertainty about the

company’s value. Bhattacharya (1979) and Miller and Rock (1985) suggest that

outside investors have imperfect information about firms’ profitability, and therefore

dividends function as a signal of expected cash flows. Hence dividend act as signal

of the stability of the firms’ future cash flows.

The idea is that there are many signals which can give hints to what level of future

cash flows can be expected, or if they will increase or decrease. The reasoning is that

firms which are confident about high future cash flows would like to communicate
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this information to the investors because it could most likely increase market value of

the firm. At the same time however, any firm would like to increase their market

value, so the signals should be such that poor performing firms would be unable to

mimic them.

Signaling helps to explain why some firms would want to pay out dividends. In most

cases dividends’ benefit to shareholders is smaller than from capital gains because of

the higher tax rate; however dividend announcements can be used to highlight

managers’ confidence in expected future prospects of the firm. Research in dividends

done by Bhattacharya (1979) and indicates that the effect of signaling by means of

dividend payouts is greater in cases with higher degree of asymmetric information.

They show that the level of asymmetric information is positively correlated with

stock price effects from signaling through dividend announcements.

However DeAngelo, DeAngelo and Skinner (1996) and Benartzi, Michaely and

Thaler (1997) find opposing evidence that dividends are not good at explaining

future earnings. If the effect of asymmetric information on dividends is great, then it

should be clearly reflected by smaller firms paying out dividends to a higher extend

than the larger. Managers are often reluctant to reduce dividend payments base a part

of their perception of the certainty about future earnings on announcements of

dividends. Therefore dividend omissions are not well received by the investors.

Investors see increases in dividends as a positive signal while decreases are

perceived as negative. Furthermore Bernheim and Wantz (1995) show that the effect

of dividend-signaling is even higher when taxes on dividends are high.

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The choice of dividend policy decides whether or not dividend-signaling sends

information to the investors. Managers can set the policy so that dividends are paid

as a fixed percentage of earnings resulting in a disappearance of the signaling effect.

Investors can no longer rely on changes in dividends as a signal of the future

prospects of the firm, because dividends are no longer set by managers to reflect their

future earnings expectations.

2.4.5 Agency Cost Theory

It was first discussed in the work of Rozeff (1982) and Easterbrook (1984) followed

by the work of Jensen and Meckling (1976) which constructed a model which

considered dividend as a mechanism for reducing agency costs. Therefore Dividends

can be seen as a tool to reduce agency costs. Agency problem simply refers to the

principal-agent problem where the principle is the holder of the stocks or

shareholders and the agent is the manager.

The main duties of the manager would be to run the firm effectively and efficiently

so as to maximize firm value and also maximize returns to the shareholders.

However, agency problem arises when managers’ and shareholders’ interests are not

in line with each other. This may arise since the manager is not acting in the interest

of the shareholders, for example, the manager is not investing in projects that the

shareholders consider to be worth investing. Hence the cost of monitoring the

managers is referred to as the agency costs. However, another problem that exists in

this case is that the managers are involve in the daily running of the business and

they are more aware about which investment should bring higher positive returns.
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Hence one method which can be argued to help overcome the agency problem is

through dividend payouts. It can be said that firms would have to stay in capital

markets to keep raising funds. Funds raised are mostly through loans from banks,

insurance companies and other credit institutions. These institutions will be acting as

a control since, by giving credit, they would be able to monitor the activities of the

company to determine whether the company is being able to repay its debt

obligations. In this case, Easterbrook (1984) argued that since the credit institutions

are actually monitoring the firm, shareholders accept to pay higher tax rates as they

do not incur or incur less costs in monitoring the activities of the managers to ensure

that firm value is being maximized. On the other hand, with such monitoring, the

firm will have to produce positive cash flows thereby generating profits. Hence it can

be said that dividend payout not only reduce the agency problem but also convey

some information about future earnings.

2.4.6 Life Cycle Theory

The life cycle theory is also cited as one of the explanations for dividend payment.

Mueller (1972) proposed a formal theory that a firm has a relatively well-defined life

cycle, which is fundamental to the firm life cycle theory of dividends. The theory

explains that as firms pass through the various stages in their lives, they tend to alter

the dividend policy depending on the financial needs of each stage. Implied in this

theory is the fact that firms that are in their growth stages are less likely to pay more

dividends as compared to firms that are at their maturity stages. Old firms therefore,

because they do not have a lot of growth opportunities to fund, are expected to pay

more dividends.
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2.5 Empirical Literature Review

In section 2.4 theories regarding dividend policy have been described in detail where

by the seminal article by Miller & Modigliani (1961) that is groundbreaker in the

theoretical modeling of dividends, which first proposed dividend irrelevance. There

are numbers of researchers have attempted to explain the determinants of dividend

payout policy which form the review of the empirical studies in this section on the

determinants of dividend payout policy and has a particular focus on those that have

been conducted since the 2000s and it is presented chronologically.

Kania & Bacon (2005), examined what factors motivate corporate dividend decision

for the 2004.The sample of 542 companies of NASDAQ, AMEX, NYSE and OTC

exchanges selected using power-screening tool from multex investor. The ordinary

Least Squares regression has been used to analyze the data. The study concluded that

the dividend payout ratio is significantly affected by the profitability (return on

equity), growth (sales growth), risk (beta), liquidity (current ratio), control (insider

ownership) and expansion (growth in capital spending).

Also,Amidu and Abor (2006) investigated determinants of dividend payout policy on

a six-year period between 1998 and 2003 for listed firms in Ghana stock Exchange.

Twenty firms used as sample which presented 76 per cent of listed firms with panel

data methodology in which ordinary least squares model used to estimate regression

equation. The results show positive relationships between dividend payout ratios and

profitability, cash flow, and tax. The results also show negative associations between

dividend payout and risk, institutional holding, growth and market-to-book value.
 24

However, the significant variables in the results are profitability, cash flow, sale

growth and market-to-book value. This shows that the profitable companies tend to

pay more dividends. If the company has more cash flow, it will pay more dividends.

Also, companies that have a higher market-to-book value, have more investment

opportunities for investment and therefore less likely to have paid dividends.

Furthermore, Baker et al. (2006) reexamined managers views on dividend policy by

using sample of 121 Norwegian firms listed on the Oslo Stock Exchange that paid

dividends in 2003. The survey instrument method used in the study and their results

indicate that the level of current and expected future earnings, the stability of

earnings, the current degree of financial leverage, and liquidity constraints are the

most important factors influencing the dividend policy of Norwegian firms. The

result confirms pervious study by U.S. managers about earnings in determining

dividend policy. By contrast, Baker et al. finds that Norwegian managers view legal

rules and constraints as more important than do their U.S. counterparts and attribute

this finding to the greater degree of government regulation that firms face in Norway.

In addition, Al-Malkawi (2007) examined the determinants of corporate dividend

policy in Jordan. The study used a firm-level panel data set of all publicly traded

firms on the Amman Stock Exchange between 1989 and 2000. The study examined

the determinants of the amount of dividends using Tobit specifications. The results

suggested that the proportion of stocks held by insiders and state ownership

significantly affect the amount of dividends paid. Size, age, and profitability of the

firm seem to be determinant factors of corporate dividend policy in Jordan. The

 25

findings provided strong support for the agency costs hypothesis and were broadly

consistent with the pecking order hypothesis.

On the other side, Al-Twaijry (2007) conducted a research on Dividend policy and

payout ratio by taking evidence from the Kuala Lumpur stock exchange for the year

2001 to 2005.The Pearson correlation was used with cross sectional sample of 300

firms.The purpose of the research was to identify the variables with an expected

influence on dividend policy and on payout ratio in an emerging market. Factors

including Net Earning per share, cash available per share, book value of the share,

company size, company age, past dividends, and past and future earnings were

discussed. Eight hypotheses were developed and tested from the Kuala Lumpur

Stock Exchange. The results suggested that current dividends were affected by their

pasts and their future prospects. Payout ratios were not found to have a strong effect

on the company’s future earnings growth, but had some significant negative

correlation with the company’s leverage. Cash per share and share book value

significantly and positively affect both dividends per share and payout ratio.

A part from that also, Jumah et al. (2008) investigated dividend policy of American

firms between 1994 and 2003 for 132 manufacturing companies. His main purpose

was to compare Features of the companies that pay cash dividends against companies

that do not adopt this policy. The regression model used to analyze data with t-test

statistic was used to verify financial variables. Output of the analysis demonstrates

that liquidity ratios, profitability ratios and firm size are main variables determining

dividend policy of the company. Examines the Beta in this study showed that
 26

investors think the company that pay cash dividends less risk than companies that do

not have to pay. He also cites that it seems that managerial and behavioral issues are

important factors to determine a company’s cash dividend policy.

However, Anil and Kapoor (2008) in their paper attempted to analyze empirically the

determinants of dividend payout ratio of the Indian Information Technology sector

listed companies in india. The correlation matrix was constructed and multiple linear

regression analysis was used for the pooled data of seven years from 2000 to

2006.The result revealed that cash flows, corporate tax, sales growth and market-to-

book value ratio do not explain the dividend payment pattern of the IT sector. Only

liquidity and beta (year-to-year variability in earnings) were found to be noteworthy

determinants.

Moreover, Hafeez Ahmed & Attiya Y. Javid (2009) examines the dynamics and

determinants of dividend payout policy of 320 non-financial firms listed in Karachi

Stock Exchange during the period of 2001 to 2006. For the analysis they use

dividend model of Lintner (1956) and its extended versions in dynamic setting. The

results consistently support that Pakistani listed non-financial firms rely on both

current earnings per share and past dividend per share to set their dividend payments.

However, the dividend tends to be more sensitive to current earnings than prior

dividends. The listed non-financial firms having the high speed of adjustment and

low target payout ratio show the instability in smoothing their dividend payments. It

is found that the profitable firms with more stable net earnings can afford larger free

cash flows and therefore pay larger dividends. Furthermore the ownership
 27

concentration and market liquidity have the positive impact on dividend payout

policy. Besides, the investment opportunities and leverage have the negative impact

on dividend payout policy. The market capitalization and size of the firms have the

negative impact on dividend payout policy which shows that the firms prefer to

invest in their assets rather than pay dividends to their shareholders.

Al-Kuwari (2009) studied the determinants of the dividend policy in GCC countries.

The study investigated the determinants of dividend policies for non-financial firms

listed on the Gulf Co-operation Council (GCC) country stock exchanges. This study

used a panel dataset of 191 non financial firms between the years of 1999 and 2003.

Seven hypotheses pertaining to agency cost theory were investigated using a series of

random effect Tobit models.The study found out that the firms pay dividends with

the intention of reducing the agency problem and the listed firms in GCC countries

alter their dividend policy frequently and do not adopt a long-run target dividend

policy. The study concluded that dividend payments are strongly and directly related

to government ownership, firm size and firm profitability but negatively to the

leverage ratio.

He and Li(2009), using data from listed companies in China's stock market (the

largest developing economy) between 2003 and 2007 examined factors affecting a

dividend payout policy of the companies. A logistic regression model was used with

time series and cross sectional approach. They concluded that the characteristics of

organizational structure most important factor that influence dividend policy in

Chine’s firms. Overall, they found, that profitable, low leverage, high cash holding,
 28

stronger shareholder protection firms, and those firms with state ownership prior to

listing and undertaking subsequent equity offerings are more likely to pay dividends

and cash dividends.

Okpara, Godwin Chigozie (2010), Investigate the factors determining dividend pay-

out policy in Nigeria. To do this, factor analysis technique was first employed and

then alternate econometric method used on the identified critical factors to ascertain

the authenticity or validity of the identified factors. The results show that three

factors-earnings, current ratio and last year’s dividends impact significantly on the

dividend payout and dividend yield in Nigeria. Earnings exert a negative impact on

the payout ratio indicating that they are apportioned to retention (as they increase) for

the growth of the firm. While current ratio and the previous year’s dividend exert a

positive impact on the payout ratio and dividend yield, showing firstly that firms are

more willing to pay out dividends when they have no problem with meeting their

short-term needs for cash, and secondly that firms try to increase their payout ratio

from its previous level. The researchers therefore conclude that the three variables,

earnings, current ratio and previous year’s dividends are goods predictors of dividend

payout policy in Nigeria.

Gill et al. (2010) examined Determinants of Dividend Payout Ratios Evidencefrom

United States. The paper intended to extend Amidu and Abor (2006) and Anil and

Kapoor (2008) findings regarding the determinants of dividend payout ratios by

examining the same for the American service and manufacturing firms. The study

applied co-relational and non-experimental research design which is a central to

 29

quantitative research approach.They found that for the entire sample of 266

companies the dividend payout ratio was the function of profit margin, sales growth,

debt-to-equity ratio, and tax. For firms in the Services industry the dividend payout

ratio was the function of profit margin, sales growth, and debt-to-equity ratio. For

manufacturing firms they found that dividend payout ratio was the function of profit

margin, tax, and market-to-book ratio.

Appannan and Sim (2011)examined the leading determinants that affecting the

dividend payment decision by the company management in Malaysia listed

companies for food industries under the consumer products sector.The sample of five

(5) companies selected from 2004 to 2008 and analyzed by using Pearson correlation

and multiple regression model of SPSS.The study showed that variables having a

strong relationship with dividend payout are not necessarily the determinants of the

dividend payment decision such as profit-after-tax that has the strongest relationship

with dividend per share. The study further confirmed the fact that debt-to- equity

ratio and past dividend per share were the important determinants of dividend

payment.

Imran (2011) undertook a research on Determinants of Dividend Payout Policy a

Case of Pakistan Engineering Sector. The purpose of the study was to empirically

investigate the factors determine the dividend payout decisions in the case of

Pakistan’s engineering sector by using the data of thirty-six firms listed on Karachi

Stock Exchange from the period 1996 to 2008.The multiple panel data(cross

sectional) /time series regression used parallel with ordinary least squares. The
 30

results showed that dividend per share was a positive function of last year’s dividend,

earning per share, profitability, sales growth and the size of the firm, whereas

dividend per share had a negative association with cash flow. The liquidity of the

firm had found unrelated to dividend payouts in the case of Pakistani engineering

firms. So the previous year dividend per share, earnings per share, profitability, cash

flow, sales growth, and size of the firm were found to be the most critical factors

determining dividend policy in the engineering sector of Pakistan.

In addition, Al-Ajmi and Hussain (2011) carried out a study on corporate dividends

decisions evidence from Saudi Arabia. The paper aimed to test the stability of

dividend policy, test the effect of cash flow on the company’s dividend policy,

identify the factors that determine a firm’s cash dividend payments, and examine the

characteristics of dividend-paying and non-paying firms. The hypotheses were tested

using unbalanced panel data for a sample of 54 Saudi-listed firms during 1990-2006

where by Lintner’s model and fixed effect panel regression were used.

The major Findings were Saudi firms pay out a lower proportion of their cash flows

compared to the proportion of dividends of reported earnings. Firms had more

flexible dividend policies since they were willing to cut or skip dividends when profit

declines and pay no dividends when losses were reported. Lagged dividend

payments, profitability, cash flows, and life cycle were found to be determinants of

dividend payments. Agency costs were not a critical driver of dividend policy of

Saudi firms. Also zakat was found to play a role in explaining firm’s dividend

decisions.
 31

Also, Faris AL- Shubiri (2011), Investigate the determents of the dividend policies of

the 60 industrial firms listed on the Amman stock exchanges (ASE) for the period of

2005-2009, and to explain their dividend payment behavior. This study used the

Tobit regression analysis, and Logit regression analysis, and hence the random

effects Tobit / Logit models are favorable than the pooled models. The findings of the

study suggest that, there is a significant effect of Leverage, Institutional Ownership,

Profitability, Business Risk, Asset Structure, Growth Opportunities, and Firm Size on

the dividend payout in listed firms of Amman stock exchange as the same

determinations of dividends policy as suggested by the developed markets.

Al Shabibi and Ramesh (2011) presented a study regarding determinants of

dividends in United Kingdom. The sample consisted of 90 non-financial companies

listed on the stock exchange in United Kingdom in 2007. The multiple regression

model was used to analyze the data collected through Forecasting Analysis and

Modeling Environment (FAME). The result revealed no significant relationship

between dividends and growth, industrial type, tangibility and gearing ratio.

However a fairly strong relationship was established between the companies’

dividends and profit, size and risk. The authors explain the positive relationship with

risk by referring to the signaling theory. They state that riskier firms may want to

signal stability and therefore chose to pay dividends to shareholders.

Marfo-Yiadom and Agyei (2011) undertook a research on the determinants of

dividend policy of banks in Ghana. Panel data covering the five-year period 1999-

2003 were analyzed within the framework of fixed and random effects technique.
 32

Sixteen banks were used as a sample in the study. The results showed that

profitability, debt, changes in dividend and collateral capacity were the statistically

significant factors which positively influence dividend policy of banks in Ghana. On

the other hand, they found that growth and age influenced bank dividend policy

negatively and significantly. Cash flow had a negative relationship with dividend

policy and the result was not significant. Consequently, the major determinants of

dividend policy of banks were profitability, leverage, changes in dividend, collateral

capacity, growth and age. In all study found support.

U. Uwuigbe et al. (2012), Investigated the relationship between the financial

performance and dividend payout among listed firms’ in Nigeria. It also looks at the

relationship between ownership structure, size of firms and the dividend payouts.

The annual reports for the period 2006-2010 were utilized as the main source of data

collection for the 50 sampled firms. The regression analysis method was employed as

a statistical technique for analyzing the data collected. Hence, concluded that, there is

a significant positive association between the performance of firms and the dividend

payout of the sampled firms in Nigeria. The study also revealed that ownership

structure and firm’s size has a significant impact of the dividend payout of firms too.

Overall, S.Gul et al. (2012), Investigated the impact of different firm specific factors

on the dividend policy of companies by selecting a sample of 18 banks listed in KSE

for the period 2006-2011. The dependent variable was dividend policy where as

explanatory variables include, firm size and risk, profitability, firm’s growth and

leverage where by simple correlation was used. It was found that out of 18 banks 11
 33

banks pay dividends whereas seven banks do not. The results have shown that the

independent variables growth, profitability and firm size have positive coefficient of

correlation when the dependent variable is dividend yield and Dividend Payout

Ratio. However there was strong linear association between profitability and firm

size with dividend policy but the variable growth rate has weak positive correlation

with dividend policy. In contrast, the variables leverage and firm risk has inverse

linear relationship with dividend policy.

Finally, F.Malik et al. (2013), Examined the determinants of dividend policy of firms

listed on Karachi stock Exchange by using panel data of 100 financial and non-

financial firms over the period 2007 to 2009. The panel data ordinary least square

regression was used to compile the data.They found that liquidity, leverage, earning

per share, and size are positively related to dividend, whereas growth and

profitability are found to be insignificant determinant of dividend policy. The results

from probit model estimation revealed that earning per share, company profitability,

and size increase the probability of companies to pay dividend, whereas growth

opportunities decrease the probability of paying dividends.

2.6 Research Gap

In above paragraphs, review of literature shows that the dividend determinants have

been well researched and well documented in developed countries, emerging markets

like Malaysia,India,Pakistan and Saudia Arabia and few in Africa like Nigeria, south

Africa and Ghana but there is paucity of empirical studies in Tanzania context.

Therefore the study required to fill the knowledge gap existing by empirically
 34

chalking out the important determinants regarding dividend payout policy in

Tanzania for the manufacturing companies listed at DSE. Furthermore, various

studies from different country, economy and business environment have been carried

out to solve the dividend puzzle. But due to the inconsistency or, the variation in

legal, the tax and the accounting policy among the countries and across industries

with mixed characteristics, thus why there is no unified way to set out dividend

payout policy. This implying that dividend puzzle still exists and necessitate carrying

out the study regarding determinants of dividend payout policy for the manufacturing

companies listed at DSE in Tanzania. Therefore this research work is humble

contribution to solve dividend puzzle.

Finally, most of existing studies use multiple regression but not panel data (cross

sectional)/time series multiple regression. This study adopts another methodology,

panel data regression in analyzing the determinants of dividend payout policy for the

manufacturing companies listed at DSE in Tanzania.

2.7 Research Conceptual Framework

In order to examine the research problem of this study, the following conceptual

framework has been adopted by which the following diagram describes the

relationship among variables of interest.

2.8 Summary

The aim of this chapter was to review the theoretical and empirical literature on

determinants of dividend payout policy. The chapter provided the meaning of

 35

dividend policy and reflection on the development of the DSE. Furthermore, various

theories were discussed by including dividend irrelevance theory, bird in the hand

theory, signaling theory and agency cost theory. Also the empirical studies from

different countries which describe and pin point factors that determine the dividend

payout have been elaborated.Finally the research gap was formulated based on

unsolved dividend puzzle and research conceptual framework was proposed. The

immediate following chapter describes the methodology used to carry out the present

study.

Table 2.1: The Conceptual Framework of the Study

Independent Variables Dependent Variable

Liquidity
Profitability
Firm Size Dividend payout
Growth
Debt- Equity Ratio/Leverage

(Source: M. Rafique 2012)

 36

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

The objective of this chapter is to describe the research methodology of this study.

The chapter has been organized as follows 3.2 provides the research design 3.3

presents description of empirical model 3.4 describes statement of hypotheses 3.5

provides measurement of variables and 3.6 describes the testing of hypotheses 3.7

gives a summary of the chapter

3.2 Research Design

The most important problem after defining the research problem is preparing the

design of the project. A research design helps to decide upon issues like what, when,

where, how much, by what means etc, with regard to research study. In general, the

research design is the conceptual structures within which research is conducted; it

constitutes the blue print for the collection, measurement and analysis of data, (Seltiz

et al. 1962).

Therefore the research design for this study is a quantitative research method. Aliaga

& Gunderson (2002) defined “quantitative research is explaining phenomena by

collecting numerical data that are analyzed using mathematically based methods”.

Also the quantitative method puts more emphasis on the results Bryman & Bell

(2007) with causality relationship. The method has been used due to the fact that,
 37

the aim of the study is to generalize the truth found in the samples listed companies

regarding the determinants of dividend payout. This generalization under quantitative

method can be obtained through a systematic way of seeking facts and causes of

phenomena, focuses on analysis of numerical data, uses of controlled measurements

and statistically analyzing to test the stated hypotheses. Therefore the method is

constructed in a manner that allows others to repeat the same and obtain similar

result which is real and unbiased with establishment of casual relationship.

Furthermore, apart from the possible discovery of causal relations and generalization,

it is very much statistical which reduces personal implication of the researcher to a

negligible minimum (it is difficult to alter the result) (Schulz, 2003). Hence this

method is an appropriate for the study as it consists of an excellent way of finalizing

result and proving or disproving the hypotheses with available statistical and

econometric methods which include correlations, regressions, time series analysis

etc. The statistical analysis under this study measured by using SPSS.

3.2.1 Types and Source of Data

The study focused on Tanzanian (domestic) firms listed on the DSE. The study used

secondary data which has been collected from the Annual Reports, where the

financial statements and other details of the companies are available. The Annual

report have been sourced from the website of all selected firms, DSE publication and

data base of African listed firms Annual report. This study examine the determinants

of dividend payout for all firms in the areas of manufacturing sector or industrial

sectors for a period of 5 years from 2007-2011. The selection of secondary data was
 38

due to the nature of study of ascertaining how dividend payout varies between the

company and year rather than why dividend paid or not.

3.2.2 Scope of the Study and Time Frame

The scope of this study only focused on the leading determinants of dividend payout

policy for the Tanzanian manufacturing companies listed at DSE for the time period

of 2007 to 2011.The period of study is based on the latest period of available data.

Since the DSE is a relatively new stock exchange, (started trading 15 th April 1998)

the number of companies listed before 2000 was very small. Furthermore, the data

for years before 2000 were not available. The study included all 5 companies

(Domestic) listed on the DSE and exclude foreign manufacturing listed companies.

3.2.3 Sampling Procedure and Sample Selection

The sampling technique of this study is non probability sample of purposive

sampling. This is due to the fact that purposive sampling allows selecting

observations that assist and based on specific purposes associated with answering a

research questions in the most appropriate way. The aim of the study is to examine

the determinants of dividend payout of listed manufacturing companies; therefore the

companies are deliberately selected for the important of information they can provide

that cannot be gotten from other choices of companies. In this study, the companies

fulfill a number of preselected criteria in order to be included in the study therefore

purposive sampling is the most appropriate in our case. Furthermore, in order to test

the determinant factors of dividend payouts policy of manufacturing listed

companies at DSE numerical data representing characteristics of the firms have been

collected. The variables of the study have been taken and calculated from the Audited
 39

Annual reports of five companies out of the seventeen listed companies for the

period of 2007 to 2011. The five (5) firms constituted the sample set for the study

which represented 100% of total domestic manufacturing firms in DSE. These Five

(5) Public listed companies are TBL, TCC, TATEPA, SIMBA, TWIGA have been

chosen as a sample study because companies listed in DSE issue shares publicly to

all the investors and where dividend payments normally declared by the companies

to their shareholders.

The criteria for the companies included:-

i. Cash dividend paid for the year under consideration

ii. Declared cash dividends for the year prior to the year under consideration
iii. Manufacturing company in nature
iv. Domestic manufacturing company/firm
v. Should not be in loss for the whole study period of 2007-2011

3.3 Description of the Empirical Model

3.3.1 Panel Data Analysis

Due to the combination of cross sectional data and time series data, the appropriate

method of analysis selected was panel data analysis for five manufacturing firms

listed at DSE covered period of 2007 to 2011. SPSS software selected to analyzing

the statistical data of this study. This is due to the fact that, SPSS provides

sophisticated data analysis, regression, and forecasting tools on Windows based

computers. It allowed the researchers to perform many data management and

statistical analysis tasks and permits researchers to analyze quantitative input data in

many different features such as a paired-different test and factor analysis. With SPSS

you can quickly develop a statistical relation from panel data (cross sectional data)
 40

and then use the relation to forecast future values of the data. Therefore it is more

appropriate to use SPSS in this study.

Table 3.1: Depicts the Listed Firms with Corresponding Year, Nature and

Origin Listed Firms of DSE as At 31 December 2012

Issuer/ Nature Ipo Price & Year Origin

Company Cross-Listed Per Listed
Share
Tanzania Oxygen Services 550/= Ipo 1998 Tanzania
Ltd.
Tanzania Breweries Manufacture 500/= Ipo 1998 Tanzania
Ltd.
Tanzania Tea Manufacture 330/= Ipo 1999 Tanzania
Packers Ltd.
Tanzania Cigarette Manufacure 410/= Ipo 2000 Tanzania
Co.Ltd
Tanga Cement Co. Manufacture 300/= Ipo 2002 Tanzania
Ltd
Swissport Tanzania Services 225/= Ipo 2003 Tanzania
Ltd.
Tanzania Portland Manufacture 435/= Ipo 2006 Tanzania
Cement Co. Ltd.
Dar es Salaam Banking 275/= Ipo 2008 Tanzania
Community Bank
National Banking 600/= Ipo 2008 Tanzania
Microfinance Bank
Kenya Airways Services 250/= cross-listed 2004 Kenya
East African Manufacture 5,860/=cross- 2005 Kenya
Breweries Ltd. listed
Jubilee Holdings 2,000/= cross- 2006 Kenya
Ltd. listed
KCB Group 440/= cross-listed 2008 Kenya
CRDB Banking 150/= Public Offer 2009 Tanzania
National Media 3,500/= Cross- 2011 Kenya
Group listed
African Barrick 13,660/= Cross- 2011 London
Goldmine listed
Precision Air Services 475/= 2011 Tanzania
Services Ltd.
Source: DSE 2012
 41

3.3.2 Time Series (Cross Sectional) Multiple Regression Model

Beside, the panel character of the data collected allow for the use of panel data

methodology. Panel data involves the pooling of observations on a cross-section of

units over several time periods and provides results that are simply not detectable in

pure cross-sections or pure time-series studies (Freeman 1984). The general form of

the panel data model can be specified more compactly as:

Yi,t =αi+βXi,t+εi,t

In this equation, Yi,t represents the dependent variable, which is the firm’s dividend

policy and Xi,t contains the set of explanatory variables in the model. The subscripts i

and t denote the cross-sectional and time-series dimension respectively. Also is taken

to be constant over time t and specific to the individual cross-sectional unit i.

In the light of the above model and on the base of selected variables the current study

used econometric model to test the quantitative panel data.

DVP = ƒ (PROF, LIQ, GR, SIZE, LEV)

DVPi,t+1 =β0+ β1PROFi,t+ β2LIQi,t+ β3GRi,t+ β4SIZEi,t+ β5LEVi,t+ε

Where DVP=Dividend payout

PROF = Profitability

LIQ = Liquidity

GR = Growth

SIZE = Firm Size

LEV = Leverage

ε = error term
 42

These variables have been listed with their expected relationship with in the Table

No.03

Table 3.2: Depicts the Independent Variables with Their Expected Relationships

with Dividend Payout

VARIABLES ABBREVIATION EXPECTED

Dependent Dividend DVP Nil
Payout
Independent Profitability Prof Positive
Liquidity Liq Positive
Growth Gr Negative
Firm Size Size Positive
Leverage Lev Negative

3.4 Statement of Hypotheses

3.4.1 Profitability and Dividend Payout

From the literature review described in chapter two, the dividend payout ratio

depends on the firm’s profitability. This because profitable firm are willing to pay

higher amounts of dividends and hence positive relationship is expected between

firm’s profitability and its dividends payments. This result is also supported by

signaling theory of dividend policy. Myers (1984) supports the theory by suggesting

that, within the pecking order preferred by managers for internal financing, dividend

policy is affected by profitability.

Pruitt and Gitman (1991) asked financial managers of the 1000 largest U.S. and

reported that, current and past year profits are important factors influencing dividend
 43

payments. Baker and Powell (2000) conclude from their survey of NYSE-listed

firms that dividend determinants are industry specific and anticipated level of future

earnings is the major determinant. Corporate dividend policy usually change with the

change in its past profits, current profits and expected future profits (Darling, 1957).

A study on 54 Saudi-listed companies during 1990 to 2006 showed that firms

reporting lower profits tend to skip dividends or pay low dividends. Profitability is

one of the important determinants of dividend payments (Ajmi and Hussain, 2011).

Another study in China during 1994-2006 presents that profitability is an important

determinant of dividend policy of a firm (Hang, Shen, and Sun, 2011). Furthermore,

several studies have documented a positive relationship between profitability and

dividend payouts (Jensen et al. 1992) and (Fama and French, 2002). Evidence from

emerging markets also supports the proposition that profitability is one of the most

important factors that determines dividend policy (Pandey 2001), and( Aivazian et

al. 2003),Therefore, based on the above discussion the study hypothesized as

follows:-

1. Profitability has a positive and significant impact on dividend payout policy of

listed Tanzanian manufacturing firms.

3.4.2 Liquidity and Dividend Payout

Liquidity is a vital factor that affects the payment of dividends. It is very important to

compare a firm’s liquidity position in relation to its dividend payment. Logically, a

firm will only pay dividend if it has a strong cash position. Cash dividend
 44

distribution not only depends on the profitability of firms but also depends on

liquidity.

According to Liu and Hu (2005), if the cash dividend is less than the free cash flow,

it means the firm has residual cash, if cash dividend is more than the free cash flow

then it means the firm needs financing to meet the requirement of cash dividend. A

poor liquidity position means less generous dividend due to shortage of cash. Alli, et

al. (1993) argues that dividend payments depend more on cash flows, which reflect

the company's ability to pay dividends, than on current earnings, which are less

heavily influenced by accounting practices. Amidu and Abor (2006) found a positive

relationship between cash flow and dividend payout ratios. Anil and Kapoor (2008)

also indicate that cash flow is an important determinant of dividend payout ratio.

Hence; liquidity formulated hypothesis as:-

2. Liquidity has a positive and significant impact on dividend payout policy of

listed Tanzanian manufacturing firms.

3.4.3 Growth and Dividend Payout

Growth is the ability of the firm to remain at the same level of development at a

certain rate which is likely to be higher than the growth rate compared with other

firms Al - Najjar & Hussainey (2009). It was argued by Ho (2003) that firms which

have high opportunity for growth are expected to spend more on new projects for

expansion purposes. As a result, dividend paid to the shareholders would be less.

 45

The same finding was reported in Chang and Rhee (1990, 2003). They stated that

higher growth opportunity required more cash for expansion. This leads to retaining

earnings, rather than distributing dividends. Therefore, hypothesis is:-

3. Growth has a negative and significant impact on dividend payout policy of listed

Tanzanian manufacturing firms

3.4.4 Firm Size and Dividend Payout

Firm size have great influence, not only on whether firms pay dividends or not, but

also on the payout ratio. Firm size is expected to be an acceptable determinant of the

company decision to pay dividends to its shareholders (Al-Najjar and Hussainey,

2009). Consequently, Ho (2003) argued that big companies are more able to pay

dividends, rather than smaller companies. This is consistent with Aivazian et al

(2003) who mentioned that the larger firms have easy access to the market and are

expected to pay more dividends.

The reason is that when firms pay dividends they limit their cash available for

investments. If new investment opportunities present themselves the firms have to

fund them with either retained earnings or by issuing new debt or equity. Adedeji

(1998) find large firms to typically have access to more sources of funds and

therefore cheaper. The larger the issue of debt or equity the cheaper it is. Furthermore

Redding (1997) find that large institutional investors which include e.g. pension

funds, and insurance funds tend to invest in large corporations. The reason is that it
 46

reduces their transaction costs. Since these Investors prefer dividends the result is

that the payout tendency for large firms is higher. This result hypothesis which is:-

4. Firm size has a positive and significant impact on dividend payout policy of

listed Tanzanian manufacturing firms

3.4.5 Debt Equity Ratio/Leverage and Dividend Payout

Debt equity ratio (capital structure) can be considered as another feature which has a

strong impact on dividend behavior. According to Karam and Puja Goyal (2007), the

demand for external finance by the company usually arises on account of constraints

imposed by its internal resources since the company cannot continue with the

investment opportunities with the limited internal resources.

The higher the internal flows are given the investment requirements, the lesser will

be the demand for borrowings and vice-versa. Thus, the higher the dividend will lead

to the higher the demand for borrowing and increase the debt equity ratio and the

debt equity ratio is expected to be positively associated with dividend payout per

share.

Baker and Powell (2001) also stated that firms with less financing outside will lower

dividend payouts. In his research, he states that firms with higher levels of debt will

need higher levels of liquidity to allow payoffs on potential implicit claims and firms

will normally choose to use more equity instead of financing outside to avoid costs

of financial distress. Hence hypothesized as:-

 47

5. Leverage has a negative and significant impact on dividend payout policy of

listed Tanzanian manufacturing firms.

3.5 Measuring Empirical Variables

3.5.1 Measuring Dividend Payout:

The dividend payout ratio is defined as the percentage of the company’s earnings that

is distributed to shareholders or reflecting the percentage of net income (available for

shareholders).It is calculated by dividing the total dividend to net profit of every

stock.Rozeff (1982) was one of the studies which employed the same formula in

determining dividend payout.

Dividend payout = Total Dividend paid

Net Profit

3.5.2 Measuring Profitability

Profitability is the single most important factor in a company’s financial statement

and it has been widely used in previous studies in order to determine the relationship

with the company’s dividend payout ratio (Amidu & Abor 2006) (Anil & Kapoor

2008). Most previous studies have found a positive relationship between profitability

and the company’s dividend payouts. But many different measurements have been

used in measuring profitability however Al-Kuwari (2009) used EBIT/Equity as a

measurement of profitability.

ROE = EBIT

Equity
 48

3.5.3 Measuring Firm Size

There are different measures of firm size (e.g. employment, sales, assets, and

capitalization). In this study, the firm's natural logarithm of total asset is used as a

measure for size. This measure has frequently been used by earlier research such as

Gill, et al. (2009).

Size=Natural Log of Total Assets

3.5.4 Measuring Growth:

The majority of the previous studies have used growth in sales in order to measure

the growth rate. In this research same approach has been used the growth in sales in

order to measure the growth rate of the company. Although the majority of the

studies have used sales to measure growth, they have used the data in different ways.

Some studies have used growth opportunities in order to measure growth and they

have therefore predicted the future growth in sales (Rozeff 1982). Other studies have

used the growth of sales from the previous year (Gill et.al, 2006) (Collins et.al 1996).

This research follows the same approach as Gill et.al, (2006) and uses the previous

year’s growth rate of sales when investigating the relationship with the dividend

payout ratio. In order to calculate the growth rate the following formula has been

used:

Growth= Sales (S1)-Sales (S0)

Sales (S0)

3.5.5 Measuring Liquidity

 49

In measuring liquidity which is an important factor for dividend payout, Al-shubiri

(2011) and A.Mehta (2012) suggested the use of Current Ratio as a measure of

liquidity.

Liquidity has been measured by the following formula;

Liquidity=Current Ratio (Current Assets/Current Liabilities)

3.5.6 Measuring Leverage:

In order to measure a company’s leverage there are a wide range of formulas that can

be used. One commonly used measurement is the debt ratio which is the expressed

total debt/total assets. Debt ratio reflects the broader picture of company’s liabilities;

however it is not straight forward about the proportion of debt to equity (Jones 1979)

(Aivazian et.al 2006). According to Werner and Jones (2003) debt to equity ratio

indicates in which proportions the company is financed by creditors relative to

shareholders. Therefore, in this study I have decided to use the debt to equity ratio as

a measurement of leverage as per following formula.

Leverage= Short Term and Long Term Liabilities

Total Assets

3.6 Testing of Hypotheses

Hypotheses testing are the method of testing whether hypothesis regarding DSE are

likely to be true. The set of criteria for a decision is the level of significance for a

test. The test statistic used to determine this likelihood. Specifically, a test statistic

tells how far, or how many standard deviations, a sample mean is from the

population mean. The larger the value of the test statistic, the further the distance, or
 50

number of standard deviations, a sample mean is from the population mean stated.

Furthermore, the two-tailed tests were used, where the alternative hypothesis is stated

as not equal to (≠) the null hypothesis. For this test, the level of significance has been

placed in both tails of the sampling distribution with 1%, 5% and 95% confidence

level. Therefore the study is interested in any alternative from the null hypothesis.

The testing of hypotheses has been done by using SPSS program.

3.7 Summary

This chapter discussed the research methodology where by the quantitative research

method adopted as the approach of research design. Secondary data from Annual

report were used for the time period of five years from 2007 to 2011 with purposive

sampled of five manufacturing companies listed at DSE. Panel data (time series)

regression model formulated with dividend payout as dependent variable and

profitability, liquidity, firm size, growth and leverage regarded as dependent

variables. Empirical model developed in time series model where by SPSS used to

run descriptive statistic, correlation analysis and time series regression. Finally five

hypotheses were formulated and tested where by variables measured accordingly as

per evidence from empirical literature.

 51

CHAPTER FOUR

4.0 FINDINGS AND DISCUSSION ON THE FINDINGS

4.1 Introduction

The objective of this chapter is to present findings and discussion on the findings.

The chapter has been structured as follows; 4.2 present preliminary analysis 4.3

describes regression analysis 4.4 provides discussion on findings, finally 4.5 presents

the summary

4.2 Preliminary Analysis

4.2.1 Analysis of Descriptive Statistics

Table 4.1: Depicts the Descriptive Statistics of the Variables

N Minimum Maximum Mean Std.Deviation

Dividend 25 0.0000 1.2000 0.4580 0.3324
Profitability 25 0.0000 1.2000 0.5520 0.2823
Liquidity 25 60.2000 338.7000 177.1980 72.5228
Firmsize 25 23.1000 27.0000 25.3570 1.1768
Growth 25 -53.7000 49.3000 14.2260 20.1003
Leverage 25 0.3000 2.2000 0.7070 0.4642
Valid N (Listwise) 25
Source: SPSS Output

Table 4.1 presents and reports the summary of the descriptive statistics for the

variables included in the model to determine the dividend payout policy for the

manufacturing companies listed at DSE for the year of 2007 to 2011 in which mean,

maximum, minimum, standard deviation and 25 observations have been shown. It

shows the average indicators of variables computed from financial statements.

 52

As described in the previous chapter, Dividend payout was measured as dividend

divide by the net income after tax. The mean of dividend payout is 46 per cent and

standard deviation of 33 percent. This means that, on average the manufacturing

companies listed at DSE under the period of the study paid about 46 percent of their

net income after tax as a dividend. Regarding the standard deviation, it means the

value can deviate from its mean to both sides by 33 percent.

On the part of profitability and its relationship with dividend payout policy, the

average of 0.552 and standard deviation of 0.2823 with maximum value of 1.2 and 0

maximum value. Regarding the leverage, the mean of debt ratio of manufacturing

companies is 0.707. The highest debt ratio under the period of study is 2.2 and in the

same way the minimum ratio is 0.3.

In addition to that, the average value of growth variable is 14.226 which imply that

the manufacturing companies sales increased by the value of 14.226 over the time

period of study. The maximum value of growth is 49.3 and minimum is -53.7 while

the standard deviation is 20.1003. Furthermore, on the firm size the mean of natural

logarithm of total assets over the period of 2007 to 2011 is 25.357 and standard

deviation of 1.168 while the maximum and minimum value are 27.0 and 23.1

respectively.

Finally, the average value of liquidity is 177.198 with maximum value and minimum

value of 338.7 and 60.2 respectively while standard deviation is 72.5228 for the year

under study.
 53

4.2.2 Correlation Analysis

The result in the table 4.2 indicates that, there is a positive relationship between

dividend and profitability. The correlation coefficient is 76.8 percent and it is

statistically significant at 1 percent (0.01) level of significance. On other hand,

Liquidity, Growth and Leverage indicate the negative relationship with dividend.

Their correlation coefficient are -17.1 percent,-15.9 percent and -19.6 percent

respectively without any statistically significant. Moreover, Firm size came up with

30.4 percent of correlation coefficient and positively related without any statistically

significant.

Table 4.2: Depicts the Correlations Matrix Result of the Variables

Correlations
LIQUIDIT
DIVIDEND PROFITABILITY Y FIRMSIZE GROWTH LEVERAGE
Dividend Pearson
Correlation 1 .768** -0.171 0.304 -0.159 -0.196
Sig. (2-tailed)
0.000 0.415 0.14 0.447 0.349
N
25 25 25 25 25 25
Profitability Pearson
Correlation .768** 1 -0.261 .449* -0.01 -0.218
Sig. (2-tailed)
0.000 0.208 0.024 0.961 0.294
N
25 25 25 25 25 25
Liquidity Pearson
Correlation -0.171 -0.261 1 -0.061 0.023 -.559**
Sig. (2-tailed)
0.415 0.208 0.77 0.914 0.004
N
25 25 25 25 25 25
Firmsize Pearson
Correlation 0.304 .449* -0.061 1 .482* -.404*
Sig. (2-tailed)
0.14 0.024 0.77 0.015 0.045
N
25 25 25 25 25 25
Growth Pearson
Correlation -0.159 -0.01 0.023 .482* 1 -0.184
Sig. (2-tailed) 0.447 0.961 0.914 0.015 0.377
 54

N
25 25 25 25 25 25
Leverage Pearson
Correlation -0.196 -0.218 -.559** -.404* -0.184 1
Sig. (2-tailed)
0.349 0.294 0.004 0.045 0.377
N
25 25 25 25 25 25
**. Correlation is Significant at the 0.01 Level (2-Tailed).
*. Correlation is Significant at the 0.05 Level (2-Tailed).
4.3 Regression
Source: Analysis
SPSS Output

Table 4.3: Depicts The Model Summary Result

Model Summary
R
Squar Adjusted Std. Error of Durbin-
Model R e R Square the Estimate Watson
1
.785a 0.617 0.516 0.2313 2.334
a. Predictors: (Constant), Leverage, Growth, Profitability, Liquidity, Firm Size
b. Dependent Variable: Dividend
(Source: SPSS Output)

The result from table 4.3 indicates that the value of coefficient of correlation (R) is

0.785 which considered as a strong positive correlation. On the side of the coefficient

of determination (R2) stood at 0.617.This indicates that only 61.7 percent of the total

variation of dividend payout is accounted for by leverage, growth, profitability,

liquidity and firm size while the remaining 38.3 percent is accounted by other

factors/variables. The adjusted R2 of 0.516 supplements the high explanatory power

of the R2

The standard error of estimate is 0.2313,this is low compared to the standard

deviation of the mean of the dependent variable 0.3324 ( Table 4.1).The model is

therefore adequate and preferred.

 55

In the table 4.4 the unstandardized coefficients show the coefficients (B) and the

standard error. The constant (Intercept) shows a negative relationship with the

dividend payout while the coefficient for profitability and firm size show positive

relationship of 0.867 and 0.011 respectively. Also liquidity, growth and leverage

show negative relationship of -1.077E-5,-0.003 and-0.039 respectively.

Table 4.4: Depicts Coefficients Result of Variables Coefficientsa

95%
Unstandardized Standardized Confidence
Coefficients Coefficients Interval for B
Lower Upper
Model B Std. Error Beta t Sig. Bound Bound
1 (Constant)

-0.223 1.488 -0.15 0.882 -3.337 2.891

Profitability
0.867 0.211 0.736 4.117 0.001 0.426 1.308

Liquidity
-1.08E-05 0.001 -0.002 -0.012 0.991 -0.002 0.002
Firm size
0.011 0.057 0.038 0.189 0.852 -0.109 0.13
Growth
-0.003 0.003 -0.18 -1.064 0.301 -0.009 0.003
Leverage
-0.039 0.151 -0.054 -0.255 0.801 -0.355 0.278

a. Dependent Variable: Dividend

(Source: SPSS output)

The standard error of profitability is 0.211 and it is less than 0.4335, which is half of

the numerical value of the parameter estimate (B) of 0.867.This shows that the

estimate for profitability is statistically significant. On the other variables, standard

 56

error seems to be greater or equal to the numerical value of the parameter of estimate

(B).This implies that the estimate is statistically insignificant.

In addition, the Beta value of standardized coefficients gives the relevance of each

independent variable. The profitability has the highest beta value of 0.736 which

implies that there is strong correlation with dividend payout rather than other

variables which has less beta value of -0.002 for liquidity, 0.038 for firm size,-0.180

for growth and -0.054 for leverage.

A part from that, also the t-statistics for the coefficient of profitability is 4.117;

significance is 0.001 which is less than 10 percent significance level (0.1 %< 10%)

and greater than 95 percent confidence interval (99.9%> 95%), implying that it is

significant. However liquidity, growth, firm size and leverage indicate significance

levels which are greater than 10 percent and less than 95 percent confidence interval.

For liquidity is 0.991, firm size is 0.852, growth is 0.301 and leverage is 0.801

significance level. This concludes and predicts that, they are not significant.

4.3.1 Testing of the Overall Significance of the Regression

Table 4.5: Depicts Overall Significance of Regression Result Anovab

Model Sum of Squares df Mean Square F Sig.

Regression 1.635 5 0.327
1 6.111 .002 a
Residual 1.016 19 0.053
Total 2.651 24

a. Predictors: (Constant), Leverage, Growth, Profitability, Liquidity, Firmsize

b. Dependent Variable: Dividend
 57

Source: SPSS output

The result on table no.08 presents the overall significance of the regression which

has been tested by using F-statistics. The F value of 6.111 with a significance of

0.002 which is less than 10 percent significance level (0.2 %< 10%).This means that

the variation described by this model is appropriate and not occurred by chance.

Hence the regression is significant and linear relationship exists between variables.

4.3.2 Estimated Model

From the regression result estimation model can be constructed as per equation

below:

DVP= -0.223 + 0.867PROF - 1.08E-05LIQ - 0.003GR + 0.011SIZE - 0.039LEV

4.4 Discussion on Findings

From the above presented result, the following have been analyzed as follows;

4.4.1 Empirical Relationship between Profitability and Dividend Payout Policy

The result was positive and statistically significant at one percent level of

significance with p value of 0.000.This is consistent with the hypothesis as described

in the previous chapter which implying that profitable manufacturing companies

listed at DSE are more likely to pay dividends to their shareholders. The result also

is parallel with signaling theory of dividend policy theory. Hence the more profitable

manufacturing companies the higher the possibility of paying dividends. This result
 58

is also similar to various previous studies see;,Amidu and Abor (2006),Anil &

Kapoor(2008),Al-Najjar & Husseinay(2009), Gill et al (2010) and A.Mehta(2012).

Therefore as per empirical findings of this study, profitability is regarded as most an

important factor in influencing dividend payout for the manufacturing companies

listed at DSE in Tanzania.

4.4.2 Empirical Relationship between Liquidity and Dividend Payout Policy

The result indicated negatively insignificant relationship with dividend payout. This

contradicts the expectation from the stated hypothesis. This insignificants implies

that liquidity does not determine the dividend payout of manufacturing companies

listed at DSE in Tanzania. Since the company with poor liquidity pay higher dividend

and good liquidity pay fewer dividends for DSE context. Therefore this study does

not support the relevance of liquidity as most important consideration of dividend

policy.

4.4.3 Empirical Relationship between Firm size and Dividend Payout Policy

The p value of 0.140 of positive insignificant with dividend payout showed

inconsistent with expected result of positive significant. The result indicates that

large firms can afford to pay higher dividends than the smaller ones. This is due to

the fact that, a large company has a better access and easier way to raise funds with

lower cost and fewer constraints compared to small company. Therefore, other things

remain the same large firms are more likely to afford paying higher dividend to

shareholder Fama and French (2001).However, the insignificant indicating that

manufacturing company pay dividend regardless of size as per similar result found
 59

from A.Mehta(2012),Ho (2003) and F.Malik (2012),Al Malkawi (2007) and Redding

(1997).

4.4.4 Empirical Relationship between Growth and Dividend Payout Policy

The result revealed that, growth has negatively relationship to dividend payout with

insignificant value of 0.447.This insignificant is contrary to stated hypothesis but

negative relationship contradicts the signaling theory which states that higher growth

should contribute to higher dividend payout. The negative relationship is similar to

previous studies of Rozeff (1982), Chang & Rhee (1990), Ho (2003) and F.Malik et

al (2012).

4.4.5 Empirical Relationship between Leverage and Dividend Payout Policy

The results of this study show a negative but statistically insignificant relationship

with dividend payout of 0.349 values. This negative relationship is in line with the

agency cost theory in which the manufacturing companies with low leverage prefer

to pay high dividends and higher leverage is associated with less dividend payout.

However the study does not support the hypothesis that leverage has negative and

significant impact on dividend policy of listed manufacturing companies in Tanzania

as it is statistically insignificant. The insignificant may be due to low amount of long

term liability of manufacturing companies.

4.5 Summary

The chapter aimed to present findings and discussion on the findings. SPSS was run

and descriptive statistic, correlation analysis and regression analysis results with

estimated model were obtained in much detail. The result revealed that profitability
 60

is a positive significantly related to dividend payout for manufacturing companies

listed at DSE.This implies that the higher the profitability the higher the dividend

payout, at ceteris paribus.On other side of variables, the result revealed that there is

insignificant relationship with dividend payout. However firm size is positive related

to dividend payout and leverage, liquidity and growth are negatively related to

dividend payout. All of the result complied with existing literature except for

liquidity which is contrary to the described literature by showing negatively

relationship with dividend payout meaning the poor the liquidity the higher the

dividend payout, at ceteris paribus.The immediate following chapter bring to the

conclusion of the study.

 61

CHAPTER FIVE

5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

The aim of this chapter is to describe the conclusion of the study. The chapter is

structured as follows; 5.2 provides summary of the study 5.3 identify policy

implications and recommendations 5.4 describes limitations of the study, finally 5.5

gives suggested areas for further research

5.2 Summary of the Study

The main purpose of the study was to examine the determinants of dividend payout

policy for the manufacturing companies (firms) listed at DSE in Tanzania.

Quantitative research approach used to carry out the study. The secondary data

obtained from Annual report which extracted from website and DSE publications.

Five manufacturing companies listed at DSE selected forming the purposive sample

of the study under non probability sampling covering the period of 2007 to 2011.In

addition, Five hypotheses were formulated to be tested under the study with and the

following variables measured and included as independent variables; profitability,

liquidity, growth, firm size and leverage while dividend payout was regarded as

dependent variable.

More specifically, the analysis were performed using panel data where by SPSS were

run and statistics which included descriptive, correlations and regressions analysis

were identified as an appropriate tool for econometric analysis of the data. The
 62

regression results provided the estimate for the model where by panel data multiple

regressions were run to obtained the result. The model revealed the data to be normal

and all regressions result were consistent.

5.3 Conclusion of the Study

The study examined the determinants of dividend payout policy or the manufacturing

firms listed at DSE in Tanzania. The result of the study revealed that profitability has

positive significant relationship with dividend payout while rest variables found

insignificant relationship with dividend payout in context of DSE in Tanzania which

is contrary to the theoretical predictions. However liquidity, growth and leverage

showed negative relationship while firm size revealed positive relationship with

dividend payout. Therefore liquidity, leverage, growth and firm size found

insignificant in influencing the dividend payout decisions to manufacturing

companies listed at DSE in Tanzania. Therefore Profitability is major determinants

for dividend payout policy for the manufacturing firms listed at DSE in Tanzania

5.4 Policy Implications and Recommendations

In line with findings of this study the following can be deduced:

The model of this study is explaining and predicting the dividend behavior of the

sampled manufacturing companies. Given the fact that shareholder in practice

usually prefers company with stable and predictable dividend policy, the model in

this study could used to predict a company dividend payout. The result of this study

have provided insight into the predictor variable that have an important influence in

explaining the variation of dividend payout for companies at DSE context. Therefore
 63

understanding the determinants of dividend payouts has significant implication on

individual investor investment policy and management depending on their dividend

preference. Investors who are trying to predict future dividends will therefore gain

some relevance and useful information regarding which company selected variables

to look for when predicting future dividends. Furthermore Managers may also use

the study when determining the dividend payout since they will be given relevance

information for decision making of which variable to be considered when determine

the dividend payouts policy to adopt.

The findings indicate profitability has a positive significant impact on dividend

payout for manufacturing companies listed at DSE in Tanzania. This implies that

individual investor who prefers current high dividend should invest on profitable

company, while management should announce the dividend after considering their

profit.

Moreover, on the basis of the empirical findings of this study firm size has a positive

influence on dividend payout, therefore investor should invest on larger company to

earn higher dividend although it is not significant influencing variable. Finally other

variables like liquidity, growth and leverage have insignificant influence on dividend

payout but should be considered by investor and management during their dividend

payment decision for manufacturing companies from DSE Tanzania.

5.5 Limitations of the Study

The findings of this study involved with only five variables of profitability, liquidity,

firm size, growth and leverage which have been tested while there are other factors
 64

from empirical evidence. This means that, this research provide an insight to these

described five testable variables to manufacturing companies listed at DSE in

Tanzania.

In addition to that, the study conducted by using secondary data from annual reports

of selected companies analysed by panel data multiple regression and exclude

primary data. This is due to complexity of accessing those data from BOD who are

decision maker of dividend policy. The primary data will reveal why listed

companies payout dividend to their shareholders rather than secondary data which

examine the variation of high or low dividend payout.

Finally, the study did not include manufacturing foreign firms listed at DSE,this

implies that the findings can only be generalized to firms similar to those who

participated to the research and not fully reflected the dividend policy to all listed

firms at DSE in Tanzania.

5.6 Suggested Areas for Further Research

The results and the analysis have revealed some additional questions which need to

be answered in future studies. More company selected variables/factors than the ones

included in the research should have an impact on the dividend payout ratio. It would

therefore be interesting to conduct a similar study with different company selected

factors. For instance the impacts of firm’s age, business risk, insider ownership,

corporate tax and capital structure on dividend payouts. On the basis of the empirical

findings in this study, it can be concluded that further related research would be
 65

desirable; further study including dividend paying and non dividend paying firm

using other a regression techniques such as Tobit and Probit models to examine the

determinant variables of dividend payment decisions of the manufacturing industry

listed at DSE with using primary data from interview and questionnaires approach.

On other hand, the dependent variable in the study was the dividend payout ratio.

However, a suggestion for future studies is to replace the dividend payout ratio and

instead use the dividend yield as the dependent variable. Most previous studies have

also used the dividend payout ratio and it would therefore be interesting to see the

impact of a number of company selected factors on the dividend yield.

Finally, a time period of five years has been used in the study and for future research

I recommend to use a longer time period. It would be interesting to see whether the

results from this study are applicable if a study is conducted over a longer period of

time or during another time period. Also to reflect the dividend policy of other sector

it is very interesting to conduct the same study in different sectors like banking

sectors and services sector/industry from DSE.

 66

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APPENDIX: Panel Data Used For Estimation

Firm Year Dividend Profitability Liquidity Firmsize Growth Leverage

TBL 2007 0.9 0.5 80.2 26.0 20.8 0.4
TBL 2008 0.8 0.4 64.8 26.3 21.7 0.5
TBL 2009 0.5 0.4 60.2 26.6 21.2 0.5
TBL 2010 0.5 0.3 67.6 26.8 13.6 0.6
TBL 2011 0.4 0.3 146.1 27.0 20.5 0.4
TCC 2007 0.7 0.4 198.0 25.1 25.5 0.3
TCC 2008 0.9 0.4 176.6 25.3 20.3 0.4
TCC 2009 0.3 0.4 178.5 25.7 15.1 0.4
TCC 2010 0.5 0.5 267.0 25.9 21.3 0.3
TCC 2011 0.8 0.5 263.5 26.0 17.1 0.3
TWIGA 2007 0.2 0.4 253.9 25.4 49.3 0.2
TWIGA 2008 0.2 0.3 90.5 25.9 24.2 0.4
TWIGA 2009 0.3 0.4 187.4 26.0 20.4 0.3
TWIGA 2010 0.5 0.3 338.7 26.1 11.5 0.2
TWIGA 2011 0.6 0.3 253.8 26.3 8.8 0.3
SIMBA 2007 0.4 0.5 190.3 25.0 20.8 0.3
SIMBA 2008 0.6 0.5 140.5 25.2 29.4 0.3
SIMBA 2009 1.0 0.4 285.5 25.5 -1.2 0.2
SIMBA 2010 0.5 0.3 177.1 25.8 24.4 0.3
SIMBA 2011 0.6 0.2 181.9 25.8 8.2 0.3
TATEPA 2007 0.0 0.1 201.0 23.3 13.6 0.4
TATEPA 2008 1.2 0.6 153.2 23.1 -53.7 0.5
TATEPA 2009 0.0 0.0 143.8 23.1 -36.3 0.5
TATEPA 2010 0.0 0.0 175.8 23.3 22.2 0.6
TATEPA 2011 0.0 0.0 153.9 23.5 16.8 0.7