Do These 3 Checks Before Buying Exchange Income Corporation (TSE:EIF) For Its Upcoming Dividend

By
Simply Wall St
Published
July 24, 2021
TSX:EIF
Source: Shutterstock

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. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Thus, you can purchase Exchange Income's shares before the 29th of July in order to receive the dividend, which the company will pay on the 13th of August.

The company'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. Looking at the last 12 months of distributions, Exchange Income has a trailing yield of approximately 5.6% on its current stock price of CA$40.74. 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.

View our latest analysis for Exchange Income

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. Exchange Income paid out 199% 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. It paid out more than half (61%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Exchange Income fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
TSX:EIF Historic Dividend July 24th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Exchange Income's earnings per share have fallen at approximately 6.8% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Exchange Income has lifted its dividend by approximately 3.9% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Exchange Income is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Is Exchange Income an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Additionally, Exchange Income is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Exchange Income don't faze you, it's worth being mindful of the risks involved with this business. We've identified 4 warning signs with Exchange Income (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.