The issue of dividend has been studied comprehensively in last few decades. Still it remained as one of the most debatable issue in the field of Finance. The contradictory nature and massive importance 0f dividend in finance had made it one of the most discussable topics for researchers. Researchers in the past enclosed many aspects of dividend; few among them are views about dividend, dividend payment effects on firm value, dynamics and determinants of dividend policy, and dividend movement of different markets.

Lintner (1956) study the allocation of income of corporations among dividends, retained earnings and taxes by taking data from the years 1918 to 1941 as a training period and data from the years 1942 to 1951 as the testing period. Researchconcluded that the basic origin of dividend changes werenet earning and preceding year dividends. In addition, firms attempt to continue a constant stream of dividend and influence to make a regularly partial adjustment to a target payout ratio relatively hysterically changing their payout when a change in income occurs. In the short run, dividends are consistent to avoid frequent changes. This dispute is rooted back to the significant effort of Miller and Modigliani (1961), in which it was challenged in a perfect market condition dividend policy did not affect the value of firm. In contrast, Lintner (1962) and Gordon (1963) based “Bird-in-hand” theory and argued that in the world of ambiguity and imperfect information, high dividend payment is linked with high firm value. In addition, Black (1976) called dividend as great puzzle which need extensive researched. Furthermore, the Brealey and Myers (2005) listed dividend as one of the top ten significantvague topic in advance corporate finance. According to Anil and Sujjata (2008) emerging consensus was that no individual factor alone can describe dividend behavior.

The existing corporate theories supported that cash flow and profitability have significant impact on dividend. The aim of this study was to know the impact of cash flow and profitability on dividend payout of non financial firms in Pakistan market. This study considered free cash flow and profitability was most important for non financial firm in Pakistan market. Talat and Mirza(2010) conducted research related to ownership structure and cash flow as predictor of dividend payout policy. According to that personal ownership, cash flow delicacy, size, and leverage were negatively associated with dividend payout policy. In contrast, profitability and operating cash flow was found as determinants of cash dividend. In addition, Researcher concluded that executive ownership, personal ownership, operating cash flow, and size were important determinants of dividend while, leverage and cash flow delicacy did not contribute considerably in determining the level of corporate dividend payment. DeAngelo and DeAngelo (1990) found significant relation between cash flow and dividend changes.

Problem Statement

In the field of corporate finance, the dividend was considered as one of the most noteworthy issues. The main purpose to study the impact of cash flow and profitability on dividend payout of non financial firm in Pakistani market was to analyze the cash dividend behavior of developing countries firm. In addition, study was conducted to find out how strongly these two variables free cash flow and profitability have impact on the dividend payout because, profitability was most likely used as determinants of dividend payout in most of the previous researches’ but free cash flow was not taken too much in previous research. Furthermore, how these two variables serve as an indicator for dividend payout.

Hypothesis

This research study has tested the following hypothesis to fulfill the objective of the research.

H1: There is significant impact of free cash flow on dividend payout.

H2: There is significant impact of return on assets on dividend payout.

H3: There is significant impact of return on equity on dividend payout.

H4: There is significant impact of earning per share on dividend payout.

H5: There is significant impact of net profit margin on dividend payout.

Outline of the Study

The research structured follows. Chapter one was consist on the introduction of the thesis, it is essential to review the views and theoretical background of dividend, the statement o problem, scope and objective, hypothesis. Chapter two consisted of literature review given by various authors, theories on dividend and impact of cash flow and profitability on dividend payout. Chapter three explained methodology, it consisted of explanation of the selection of the variables, the sampling and research design, the data technique and hypothesis. Chapter four represents the analysis of results after processing the data. Chapter five composed of final result, conclusion and recommendation. Chapter six consisted of references.

CHAPTER 2:

LITERATURE REVIEW

Since 1956, dividend has always considered one of the most interested and investigated topic in world of finance.Lintner (1956) analyzed the allocation of earning of corporation among dividends, retained earnings, and taxes by taken data into consideration for years 1918 to 1941. It was found the basic determinants of dividend change are net earning and preceding year dividends. In addition, firms tried to continue a stable flow of dividend and likely made a regularly limited adjustment to a target payout ratio instead radically changing payout when earning changed.

Jensen and Meckling (1976) paid attention toward agency cost hypothesis and described that dividend restricted the funds under management control, as a result putting them under strict capital market examination. Owner’ responsibility was reduced to deal with the quality of investment and to handle the expenditure on manager prerequisites.