Stock Analysis

Why It Might Not Make Sense To Buy Eildon Capital Fund (ASX:EDC) For Its Upcoming Dividend

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It looks like Eildon Capital Fund (ASX:EDC) is about to go ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Eildon Capital Fund's shares on or after the 1st of October will not receive the dividend, which will be paid on the 22nd of October.

The company's next dividend payment will be AU$0.02 per share, on the back of last year when the company paid a total of AU$0.079 to shareholders. Calculating the last year's worth of payments shows that Eildon Capital Fund has a trailing yield of 7.6% on the current share price of A$1.05. 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! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Eildon Capital Fund

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Eildon Capital Fund paid out a disturbingly high 336% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

Click here to see how much of its profit Eildon Capital Fund paid out over the last 12 months.

ASX:EDC Historic Dividend September 26th 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Eildon Capital Fund's earnings per share have dropped 28% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

We'd also point out that Eildon Capital Fund 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. In the last four years, Eildon Capital Fund has lifted its dividend by approximately 9.6% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Eildon Capital Fund is already paying out 336% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Eildon Capital Fund got what it takes to maintain its dividend payments? Earnings per share are in decline and Eildon Capital Fund is paying out what we feel is an uncomfortably high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

Although, if you're still interested in Eildon Capital Fund and want to know more, you'll find it very useful to know what risks this stock faces. For example, Eildon Capital Fund has 6 warning signs (and 1 which is concerning) we think you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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