Title: The effect of dividend payouts on future earnings

Authors: Gizelle D. Willows; Lawrence W.K. Ho; Darron West

Addresses: College of Accounting, Leslie Commerce Building, Upper Campus, University of Cape Town, Rondebosch, 7000, South Africa ' Keble College, Parks Road, Oxford, OX1 3PG, UK ' Department of Finance and Tax, University of Cape Town, Rondebosch, Cape Town, 7700, South Africa

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.

Keywords: dividends; earnings; emerging market; value growth; payouts; future earnings; retained earnings; dividend distributions; leverage; earnings yield.

DOI: 10.1504/AAJFA.2020.110495

Afro-Asian Journal of Finance and Accounting, 2020 Vol.10 No.4, pp.569 - 583

Received: 18 Nov 2017
Accepted: 01 Oct 2018

Published online: 12 May 2020 *

Full-text access for editors Access for subscribers Purchase this article Comment on this article