RE:ONGOING DIVY?vikivita wrote: Anyone's thoughts on the sustainability of the divvy given that the consensus earnings for the year will be approximately $0.39. I know they have ample access to liquidity but do you think they're really going to tap into that pool for the next 6 to 9 months (until regional one starts resuming decent revenue) to pay out the divvy. Especially awaiting your thoughts on this one Cap
A simple but loaded question!
First, here are the disclaimers: I'm not privy to the board of directors of EIF and other than the management's discussions in the latest report, I don't have any information about their net quarterly cashflow information.
Do they have the financial ability to keep paying the dividend during a down year, even if it is above EPS and more importantly cashflow? Imo, they do. However, at some point, the board of directors might think in the best long term interests of the shareholders to reduce or suspend the dividend. If business-wise, to either ensure that EIF gets through this situation or if they need extra liquidities to make an acquisition, then they may go that route.
Now, let's assume that they have net earnings of $0.39 for the year. That would mean approx $13M. The liquidities they bring in are quite a bit higher than earnings, as they do have a good amount of depreciation and amortization (capital assets, intangible assets) and also have other non-cash items (share allowance programs, impairments). In total, they have about $39M per quarter of non cash charges that reduce earnings plus some yearly non cash charges (let's say $10M)... On top of the net earnings $13M in liquidities, you can add $39Mx4 + $10M, for a total of $179M in liquidities. From that $179M in liquidities, you would usually need to deduce roughly $110M in CAPEX expenses, which would leave $69M. This would give a full year payout of about 105% based on free cashflow less capex. They may reduce or push back CAPEX though, so that could push the payout ratio under 100%. Imo, if that scenario happens, I don't think they'll touch the dividend because it will likely improve in 2021.
However, imo, I think their earnings for the full year will be lower than $0.39. For the full year, I expect losses around ($0.50) per share. From net earnings, this would mean a net ($17M) reduction on liquidities. Add back the non-cash expenses, you are looking at cashflows of $149M. They will likely push back some of the capex expenses, so I'd use $90M for the year, for net cash of 59M. They'd have to finance around $15M of the dividends from debt in that situation, or use approx 2% of their available liquidities (cash + credit available). Payout would be roughly 125% for the year. I don't think it would be unreasonable to keep the dividend unless they forecast another year over 100% payout (on free cashflows after maintenance capex).
If they face a bigger loss than ($0.50) per share, then it will largely depend on how much capex expenses they can push back.
There is no definite line for the dividend. Last year, they had an extra $53M in free cashflows after maintenance capex and paying the dividend. This year, if they fall short anything less than $53M, you could always rationalize this by saying over 2019 and 2020 combined, the payout was 100%. Or they could look at it by targeted a payout for 2020 and 2021 (say 100% for the two years, after which they would project to go back under 60%).
To summarize... EIF likely has enough liquidities to support the dividend for a while if they choose to, without compromising the future. However, even if they have enough liquidities, it's possible that at some point they might have a better use for the long term value to reduce/suspend the dividend. If you absolutely need the cashflow from the dividend (as income), then I would probably look for a different stock than EIF.