Effects of dividend policy on shareholders' wealth maximization: A case study of Safaricom Limited

Abstract

This study sought to find out the effect of dividend policy on shareholder's wealth maximization. This covered various dividend policies that may be adopted by various commercial organizations. It also determined how the various dividend polices adopted affected the various measures of shareholder's wealth including EPS, MPS and PIE ratio. However, the main focus was Safaricom which despite its continued success has not brought a good return on investments of the shareholders who bought its shares upon its enlistment. This study thus sought to find out if the progressive dividend policy currently adopted has an effect on investor's wealth and what effect adopting a constant payout ratio or a constant dividend per share would have on investor's wealth. This research project took a descriptive design in form of a case study design and its study population was the shareholders of Safaricom Limited mainly based in Nairobi County. In addition, a systematic sampling method of sample selection was used to select a sample of 100 shareholders. Data was analyzed using descriptive statistics including frequencies and percentages to describe variable characteristics and other qualitative factors and found out that 73.75% of the respondents strongly disagree that they are satisfied with returns from the progressive policy currently adopted. In addition, 76.25% of the respondents agree that they will be satisfied with the returns that the adoption of a constant payout ratio will bring. However, 63.75% of the respondents strongly disagree that they will be satisfied with the returns that the adoption of a constant dividend per share will bring. From the findings the researcher concluded that a constant payout ratio would be preferred to a progressive dividend policy since respondents would be satisfied by its returns as opposed to a progressive dividend policy due to the fact that it will maximize wealth. Moreover, a constant dividend per share seems not to be a good way to go since it will not maximize the wealth of investors and thus they will not get maximum utility. The researcher thus recommended that management could try adopting a constant payout ratio since it will maximize shareholder's wealth and at the same time maximize investor's utility. However, the firm should not adopt a constant dividend per share because adoption of this policy would be detrimental to the firm in terms of meeting shareholder's expectations since it will not maximize the investor's wealth.