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 Eildon Capital Fund (ASX:EDC) is about to go ex-dividend in just four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn’t show on the record date. Therefore, if you purchase Eildon Capital Fund’s shares on or after the 31st of March, you won’t be eligible to receive the dividend, when it is paid on the 22nd of April.
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. Based on the last year’s worth of payments, Eildon Capital Fund stock has a trailing yield of around 7.7% on the current share price of A$1.035. If you buy this business for its dividend, you should have an idea of whether Eildon Capital Fund’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Eildon Capital Fund paid out a disturbingly high 263% 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.
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. Eildon Capital Fund’s earnings per share have fallen at approximately 23% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
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.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last five years, Eildon Capital Fund has lifted its dividend by approximately 7.6% 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. Eildon Capital Fund is already paying out 263% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
Has Eildon Capital Fund got what it takes to maintain its dividend payments? Not only are earnings per share shrinking, but Eildon Capital Fund is paying out a disconcertingly 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. Eildon Capital Fund doesn’t appear to have a lot going for it, and we’re not inclined to take a risk on owning it for the 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. We’ve identified 5 warning signs with Eildon Capital Fund (at least 3 which make us uncomfortable), and understanding these should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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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.