Readers hoping to buy Eumundi Group Limited (ASX:EBG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 2nd of September to receive the dividend, which will be paid on the 16th of September.
Eumundi Group's next dividend payment will be AU$0.024 per share, and in the last 12 months, the company paid a total of AU$0.065 per share. Last year's total dividend payments show that Eumundi Group has a trailing yield of 6.3% on the current share price of A$1.025. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Eumundi Group is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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.
Eumundi Group paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. 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 Eumundi Group's earnings per share have dropped 18% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Eumundi Group has delivered 10% dividend growth per year on average over the past 5 years.
Is Eumundi Group an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Eumundi Group is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Eumundi Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Want to learn more about Eumundi Group's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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