Exchange Income Corporation (TSE:EIF) stock is about to trade ex-dividend in four days. If you purchase the stock on or after the 29th of September, you won’t be eligible to receive this dividend, when it is paid on the 15th of October.
Exchange Income’s upcoming dividend is CA$0.19 a share, following on from the last 12 months, when the company distributed a total of CA$2.28 per share to shareholders. Looking at the last 12 months of distributions, Exchange Income has a trailing yield of approximately 7.3% on its current stock price of CA$31.04. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are 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 distributed an unsustainably high 150% of its profit as dividends to shareholders last year. Without extenuating circumstances, we’d consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Exchange Income generated enough free cash flow to afford its dividend. 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Exchange Income’s earnings per share have risen 12% per annum over the last 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.
We’d also point out that Exchange Income issued a meaningful number of new shares in the past year. 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.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago,…
Go to the news source: It Might Not Be A Great Idea To Buy Exchange Income Corporation (TSE:EIF) For It…