RELATIONSHIP BETWEEN FREE CASH FLOW AND DIVIDEND A STUDY OF THE CEMENT SECTOR OF PAKISTAN

Abstract

This study investigates the relationship between free cash flow and dividend policy. The current study uses EBIT, Tax, Dividend, Working capital, Depreciation, Capital expenditure, and FA as an independent variable and Free Cash Flows as a dependent variable to investigate the relationship between free cash flow and dividend. Study based on the cement sector, five companies were selected actively trading in Karachi Stock Exchange, during the period 2011 to 2015. Secondary data was collected through financial statements of companies and stock prices were collected from Karachi Stock Exchange. Descriptive statistics, simple and multiple regression analysis is applied to find out the relationship of the firm. However, we found that there is a negative relationship between capital structure and stock price. The present study is a unique contribution to the existing literature of finance in the context of emerging markets like Pakistan. The study found that free cash flow and earnings per share have positive effects on the dividend policy while a negative significant relationship is found between leverage and dividend policy of listed cement companies in KSE. Companies in which a high proportion of shares are held by managers are more reluctant in paying a higher dividend. Hence, the study recommends that companies in the Cement sector should endeavor to improve the level of free cash and profitability while reducing the level of leverage thereby paying a higher dividend payout policy.

Keywords: Cash Flow, Dividend Policy, Payout, Cement Sector