Eildon Capital Fund's (ASX:EDC) Dividend Will Be Reduced To A$0.014

Eildon Capital Fund's (ASX:EDC) dividend is being reduced by 30% to A$0.014 per share on 21st of October, in comparison to last year's comparable payment of A$0.02. This means the annual payment is 9.0% of the current stock price, which is above the average for the industry.

View our latest analysis for Eildon Capital Fund

Eildon Capital Fund Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 158% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 63%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Looking forward, EPS could fall by 21.5% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 194%, which could put the dividend under pressure if earnings don't start to improve.

Eildon Capital Fund's Dividend Has Lacked Consistency

Eildon Capital Fund has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2017, the annual payment back then was A$0.055, compared to the most recent full-year payment of A$0.075. This implies that the company grew its distributions at a yearly rate of about 6.4% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 21% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.

The Dividend Could Prove To Be Unreliable

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Eildon Capital Fund (1 is concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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