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Today we’ll take a closer look at US Masters Residential Property Fund (ASX:URF) 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. 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.
With a 2.6% yield and a seven-year payment history, investors probably think US Masters Residential Property Fund looks like a reliable dividend stock. A 2.6% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying US Masters Residential Property Fund for its dividend – read on to learn more.
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. While US Masters Residential Property Fund pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Unfortunately, while US Masters Residential Property Fund pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.
Is US Masters Residential Property Fund’s Balance Sheet Risky?
Given US Masters Residential Property Fund is paying a dividend but reported a loss over the past year, we need to check its balance sheet for signs of financial distress. 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). US Masters Residential Property Fund has net debt of greater than 10x its earnings before interest, tax, depreciation and amortisation (EBITDA), which we think carries substantial risk if earnings aren’t sustainable.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. US Masters Residential Property Fund 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. Low interest cover and high debt can create problems right when the investor least needs them. We’re generally reluctant to rely on the dividend of companies with these traits.
We update our data on US Masters Residential Property Fund every 24 hours, so you can always get our latest analysis of its financial health, here.
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. US Masters Residential Property Fund has been paying a dividend for the past seven years. It’s good to see that US Masters Residential Property Fund has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was AU$0.10 in 2012, compared to AU$0.02 last year. Dividend payments have fallen sharply, down 80% over that time.
We struggle to make a case for buying US Masters Residential Property Fund for its dividend, given that payments have shrunk over the past seven years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. It’s not great to see that US Masters Residential Property Fund’s have fallen at approximately 42% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
To summarise, shareholders should always check that US Masters Residential Property Fund’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. US Masters Residential Property Fund’s dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, US Masters Residential Property Fund doesn’t shape up too well as a dividend stock. We’d find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
See if management have their own wealth at stake, by checking insider shareholdings in US Masters Residential Property Fund stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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 email@example.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.