Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Exchange Income Corporation (TSE:EIF) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 29th of October will not receive this dividend, which will be paid on the 13th of November.
Exchange Income’s next dividend payment will be CA$0.19 per share, and in the last 12 months, the company paid a total of CA$2.28 per share. Calculating the last year’s worth of payments shows that Exchange Income has a trailing yield of 6.8% on the current share price of CA$33.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Exchange Income paid out 150% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Over the past year it paid out 181% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
As Exchange Income’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Exchange Income’s earnings per share have been growing at 12% a year for the past five years. Earnings are growing pretty quickly, which is great, but it’s uncomfortably to see the company paying out 150% of earnings. We’re wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.
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…
Go to the news source: Don’t Race Out To Buy Exchange Income Corporation (TSE:EIF) Just Because It’s Go…