It looks like Exchange Income Corporation (TSE:EIF) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 27th of November will not receive the dividend, which will be paid on the 15th of December.
Exchange Income’s next dividend payment will be CA$0.19 per share, on the back of last year when the company paid a total of CA$2.28 to shareholders. Last year’s total dividend payments show that Exchange Income has a trailing yield of 5.9% on the current share price of CA$38.5. If you buy this business for its dividend, you should have an idea of whether Exchange Income’s dividend is reliable and sustainable. As a result, readers should always check whether Exchange Income has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Exchange Income distributed an unsustainably high 198% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 90% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect – but we’d generally want look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Exchange Income’s payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re encouraged by the steady growth at Exchange Income, with earnings per share up 3.8% on average over the last five years. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.
Exchange Income also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill.
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