Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Exchange Income Corporation (TSE:EIF) is about to go ex-dividend in just 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Exchange Income's shares before the 30th of August in order to receive the dividend, which the company will pay on the 15th of September.
The company'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. Based on the last year's worth of payments, Exchange Income has a trailing yield of 5.2% on the current stock price of CA$43.63. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Exchange Income distributed an unsustainably high 150% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 108% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
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 that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Exchange Income's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
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. It's hard to grow dividends per share when a company keeps creating new shares.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Exchange Income has lifted its dividend by approximately 3.9% a year on average.
To Sum It Up
From a dividend perspective, should investors buy or avoid Exchange Income? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (150%) and cash flow (108%) as dividends. It's not that we think Exchange Income is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that being said, if you're still considering Exchange Income as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Exchange Income has 3 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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