Is Regal Real Estate Investment Trust (HKG:1881) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
A high yield and a long history of paying dividends is an appealing combination for Regal Real Estate Investment Trust. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Regal Real Estate Investment Trust for its dividend, and we'll go through these below.
SEHK:1881 Historical Dividend Yield, May 17th 2019
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Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to be form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Regal Real Estate Investment Trust paid out 94% of its profit as dividends. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 94% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn.
REITs like Regal Real Estate Investment Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is Regal Real Estate Investment Trust's Balance Sheet Risky?
As Regal Real Estate Investment Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company's total debt load relative to its earnings (lower = less debt), while net interest cover measures the company's ability to pay the interest on its debt (higher = greater ability to pay interest costs). With a net debt to EBITDA ratio of more than 10x, Regal Real Estate Investment Trust is very highly levered. While this debt might be serviceable, we would still say it carries substantial risk for the investor who hopes to live on the dividend.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 2.99 times its interest expense, Regal Real Estate Investment Trust's interest cover is starting to look a bit thin. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company's dividend while these metrics persist.
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. For the purpose of this article, we only scrutinise the last decade of Regal Real Estate Investment Trust's dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was HK$0.17 in 2009, compared to HK$0.15 last year. This works out to be a decline of approximately -1.2% per year over that time. Regal Real Estate Investment Trust's dividend has been cut sharply at least once, so it hasn't fallen by -1.2% every year, but this is a decent approximation of the long term change.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's good to see Regal Real Estate Investment Trust has been growing its earnings per share at 46% a year over the past 5 years. Regal Real Estate Investment Trust earnings have been growing very quickly recently, but given that it is paying out more than half of its earnings, we wonder if it will have enough capital to fund further growth in the future.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Regal Real Estate Investment Trust's is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Regal Real Estate Investment Trust out there.
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.
