Sign In
Dividend payout and future earnings growth: A South African study
Marise Vermeulen and Prof Eon Smit

Conventional wisdom posits that the payment of dividends will decrease the funds available to finance growth, and will therefore lead to lower future earnings growth. This belief was challenged in recent years with research that tested the relationship between dividend payout and future earnings growth, both on the individual company level and aggregate market level in different countries. Recent results contradict popular belief, and show that companies with high payout ratios tend to realise stronger future earnings growth.

. English    
​This study investigated the same relationship in South Africa, as an example of a developing country, using a large sample of 12 669 company-years over the period 1973 to 2009. The results fully support recent findings that dividend payouts precede higher future earnings growth.

Dividend payout
Over the years, however, much research has been done and much written about different aspects of dividend payout. A more recent area of interest is the relationship between dividend payout and future earnings growth. This relationship has been investigated in the USA, Taiwan, Europe, Singapore, Australia and Malaysia, but no such study has been done in any African country. This study's aim was to test the relationship between dividend payout and future earnings in South Africa (a developing economy), and to compare it to that of the USA (a developed economy).

South Africa and USA compared
In terms of the univariate analysis South Africa compared very well with the USA. Both countries showed a significant positive correlation between dividend payout and future earnings growth, and a significant negative correlation between dividend payout and past earnings growth. With the multivariate analysis, all three growth periods for both countries showed a highly significant positive correlation between dividend payout and future earnings growth. An interesting observation was that the relationship was stronger in South Africa than in the USA.

The other control variables did not test as significant in South Africa as in the USA, except for return on assets and asset growth. Although these variables were not significant in the regression model, they still displayed the expected relationship with future earnings growth. The fact that the chosen variables explained less of the variation in earnings growth compared to the USA indicates that there are other factors influencing earnings growth in South Africa. These factors most probably reflect the fact that South Africa is still a developing country.

Other research concluded that the payout ratio does not significantly impact on a company's future earnings growth in a developing country such as Malaysia. This is definitely not the case in South Africa and it is therefore clear that all developing countries cannot be treated the same with regard to dividend policy decisions.

The results of this study have some important implications for the valuation of firms in South Africa. Importantly, dividend payout ratio should be taken into consideration when evaluating growth expectations, as well as the current profitability and level of growth in assets.

This is a summary of the article by Marise Vermeulen, Department of Accountancy, Stellenbosch University (, and Prof Eon Smit of the University of Stellenbosch Business School (, which appeared under the same title in the South African Journal of Business Management Volume 42, Number 4 (December 2011).

The full article is available at–busman.html

Submit your comments here
Disclaimer: The views of users published on the University of Stellenbosch Business School website are their own and do not necessarily represent the views of the University of Stellenbosch Business School. Our editors reserve the right to edit and delete any and all comments received.
No comments yet.




 Featured ThoughtPrints