ELK-Desa Resources Berhad (KLSE:ELKDESA) Is Paying Out A Larger Dividend Than Last Year

The board of ELK-Desa Resources Berhad (KLSE:ELKDESA) has announced that it will be paying its dividend of MYR0.045 on the 16th of December, an increased payment from last year's comparable dividend. This makes the dividend yield 5.1%, which is above the industry average.

Check out our latest analysis for ELK-Desa Resources Berhad

ELK-Desa Resources Berhad's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, ELK-Desa Resources Berhad's earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.

Looking forward, earnings per share is forecast to fall by 0.2% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 50%, which is comfortable for the company to continue in the future.

ELK-Desa Resources Berhad's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 9 years was MYR0.065 in 2013, and the most recent fiscal year payment was MYR0.0775. This means that it has been growing its distributions at 2.0% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend Has Growth Potential

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. We are encouraged to see that ELK-Desa Resources Berhad has grown earnings per share at 8.5% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Our Thoughts On ELK-Desa Resources Berhad's Dividend

In summary, while it's always good to see the dividend being raised, we don't think ELK-Desa Resources Berhad's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 2 warning signs for ELK-Desa Resources Berhad that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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