ELK-Desa Resources Berhad's (KLSE:ELKDESA) dividend is being reduced from last year's payment covering the same period to MYR0.02 on the 18th of December. This means the annual payment is 5.0% of the current stock price, which is above the average for the industry.
Check out our latest analysis for ELK-Desa Resources Berhad
ELK-Desa Resources Berhad's Earnings Easily Cover The Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, ELK-Desa Resources Berhad was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Looking forward, earnings per share is forecast to rise by 20.3% over the next year. If the dividend continues on this path, the payout ratio could be 58% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the dividend has gone from MYR0.0433 total annually to MYR0.065. This means that it has been growing its distributions at 4.1% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
ELK-Desa Resources Berhad May Find It Hard To Grow The Dividend
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. However, ELK-Desa Resources Berhad's EPS was effectively flat over the past five years, which could stop the company from paying more every year. The company has been growing at a pretty soft 1.6% per annum, and is paying out quite a lot of its earnings to shareholders. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.
Our Thoughts On ELK-Desa Resources Berhad's Dividend
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While ELK-Desa Resources Berhad is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for ELK-Desa Resources Berhad (1 is a bit unpleasant!) 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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