Today we’ll take a closer look at CorePoint Lodging Inc. (NYSE:CPLG) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
So you might want to consider getting our latest analysis on CorePoint Lodging’s financial health here.
Some readers mightn’t know much about CorePoint Lodging’s 8.2% dividend, as it has only been paying distributions for a year or so. The company also bought back stock equivalent to around 4.8% of market capitalisation this year. There are a few simple ways to reduce the risks of buying CorePoint Lodging for its dividend, and we’ll go through these below.
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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Although CorePoint Lodging pays a dividend, it was loss-making during the past year. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
With a cash payout ratio of 130%, CorePoint Lodging’s dividend payments are poorly covered by cash flow.
REITs like CorePoint Lodging often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is CorePoint Lodging’s Balance Sheet Risky?
As CorePoint Lodging has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. 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 is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. CorePoint Lodging has net debt of 4.40 times its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. CorePoint Lodging 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. That said, CorePoint Lodging is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. With a payment history of less than 2 years, we think it’s a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was US$0.80 per share.
It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It’s good to see CorePoint Lodging has been growing its earnings per share at 27% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.
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. CorePoint Lodging has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. In sum, we find it hard to get excited about CorePoint Lodging 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.
See if management have their own wealth at stake, by checking insider shareholdings in CorePoint Lodging stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.