The effect of dividend payouts on future earnings

Abstract

The conventional expectation of the relationship between the level of dividend payout and future earnings growth, based on established finance theories, is that it is negative. This expectation stems from the perceived attractiveness of having enough available retained earnings to fund any potential future growth opportunities. However, research performed in various markets at the turn of the century has challenged this belief. This paper seeks to update this theory by investigating the relationship in a more current dataset, from 1988 to 2014. Furthermore, given the investment opportunities within emerging markets, the dataset pertains to South African listed companies. Assessing two different earning measures, over multiple years, a multivariate regression analysis revealed a statistically significant positive relationship between dividend payout and future earnings. Dividend payout decisions are seen by investors as a predictor for future value growth and, as such, management should be aware of their associated dividend distribution decisions.