Could Braemar Hotels & Resorts, Inc. (NYSE:BHR) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
In this case, Braemar Hotels & Resorts likely looks attractive to dividend investors, given its 7.0% dividend yield and six-year payment history. It sure looks interesting on these metrics – but there’s always more to the story . There are a few simple ways to reduce the risks of buying Braemar Hotels & Resorts for its dividend, and we’ll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. While Braemar Hotels & Resorts pays a dividend, it reported a loss over the last year. 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.
Of the free cash flow it generated last year, Braemar Hotels & Resorts paid out 49% as dividends, suggesting the dividend is affordable.
Braemar Hotels & Resorts is a REIT, which is an investment structure that often has different payout rules compared to other companies. It is not uncommon for REITs to pay out 100% of their earnings each year.
Is Braemar Hotels & Resorts’s Balance Sheet Risky?
As Braemar Hotels & Resorts’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Braemar Hotels & Resorts has net debt of 10.82 times its EBITDA, which we think carries substantial risk if earnings aren’t sustainable.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Braemar Hotels & Resorts has interest cover of less than 1 – which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. 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.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Braemar Hotels & Resorts has been paying a dividend for the past six years. Its dividend has not fluctuated much that time, which we like, but we’re conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past six-year period, the first annual payment was US$0.20 in 2013, compared to US$0.64 last year. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year over that time.
Braemar Hotels & Resorts 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
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Braemar Hotels & Resorts has grown its earnings per share at 15% per annum over the past five years. While EPS are growing rapidly, Braemar Hotels & Resorts paid out a very high 108% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
To summarise, shareholders should always check that Braemar Hotels & Resorts’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, the company has not been able to generate earnings growth, and its history of dividend payments too short for us to thoroughly evaluate the dividend’s consistency across an economic cycle. In sum, we find it hard to get excited about Braemar Hotels & Resorts from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 Braemar Hotels & Resorts analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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