It looks like Gladstone Land Corporation (NASDAQ:LAND) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 21st of October will not receive the dividend, which will be paid on the 31st of October.
Gladstone Land’s next dividend payment will be US$0.04 per share, and in the last 12 months, the company paid a total of US$0.5 per share. Based on the last year’s worth of payments, Gladstone Land stock has a trailing yield of around 4.5% on the current share price of $11.84. If you buy this business for its dividend, you should have an idea of whether Gladstone Land’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Gladstone Land paid out 130% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. It’s not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 106% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect – but we’d generally want look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Gladstone Land’s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Gladstone Land has grown its earnings rapidly, up 47% a year for the past five years. Gladstone Land’s dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
We’d also point out that Gladstone Land issued a meaningful number of new shares in the past year. It’s hard to grow dividends per share when a company keeps creating new shares.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Gladstone Land has delivered an average of 1.6% per year annual increase in its dividend, based on the past seven years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Gladstone Land is keeping back more of its profits to grow the business.
To Sum It Up
Has Gladstone Land got what it takes to maintain its dividend payments? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Overall it doesn’t look like the most suitable dividend stock for a long-term buy and hold investor.
Wondering what the future holds for Gladstone Land? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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