Yahoo Finance Read This Before Buying Regional REIT Limited (LON:RGL) For Its Dividend
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Could Regional REIT Limited (LON:RGL) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
Regional REIT yields a solid 7.4%, although it has only been paying for three years. It's certainly an attractive yield, but readers are likely curious about its staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
Click the interactive chart for our full dividend analysis
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Regional REIT paid out 116% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Regional REIT paid out 116% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. As Regional REIT's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Remember, you can always get a snapshot of Regional REIT's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was UK£0.04 in 2016, compared to UK£0.081 last year. Dividends per share have grown at approximately 26% per year over this time.
Regional REIT has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Regional REIT's earnings per share have been essentially flat over the past three years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. This level of earnings growth is low, and the company is paying out 116% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend payer over the next decade.
We'd also point out that Regional REIT issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Regional REIT paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. There are a few too many issues for us to get comfortable with Regional REIT from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
See if management have their own wealth at stake, by checking insider shareholdings in Regional REIT stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
