Elders Limited (ASX:ELD) is reducing its dividend to A$0.23 on the 22nd of Junewhich is 18% less than last year's comparable payment of A$0.28. The dividend yield of 8.4% is still a nice boost to shareholder returns, despite the cut.

See our latest analysis for Elders

Elders' Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. At the time of the last dividend payment, Elders was paying out a very large proportion of what it was earning and 190% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

EPS is set to fall by 5.9% over the next 12 months if recent trends continue. Assuming the dividend continues along recent trends, we think the payout ratio could reach 91%, which is definitely on the higher side. historic-dividend

Elders Is Still Building Its Track Record

It is great to see that Elders has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The annual payment during the last 5 years was A$0.075 in 2018, and the most recent fiscal year payment was A$0.56. This works out to be a compound annual growth rate (CAGR) of approximately 49% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.

Dividend Growth May Be Hard To Come By

The company's investors will be pleased to have been receiving dividend income for some time. Let's not jump to conclusions as things might not be as good as they appear on the surface. Over the past five years, it looks as though Elders' EPS has declined at around 5.9% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.



Elders' Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 3 warning signs for Elders you should be aware of, and 1 of them doesn't sit too well with us. Is Elders not quite the opportunity you were looking for? Why not check out our selection of top 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.

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