Is Pro Real Estate Investment Trust’s (TSE:PRV.UN) 9.0% Dividend Sustainable?

Is Pro Real Estate Investment Trust (TSE:PRV.UN) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Pro Real Estate Investment Trust is a new dividend aristocrat in the making. 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 Pro Real Estate Investment Trust for its dividend, and we’ll go through these below.

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TSX:PRV.UN Historical Dividend Yield, August 14th 2019
TSX:PRV.UN Historical Dividend Yield, August 14th 2019

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 form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Pro Real Estate Investment Trust paid out 118% of its profit as dividends, over the trailing twelve month period. 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.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Pro Real Estate Investment Trust paid out 92% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Pro Real Estate Investment Trust fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Pro Real Estate Investment Trust 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 Pro Real Estate Investment Trust’s Balance Sheet Risky?

As Pro Real Estate Investment Trust’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). Pro Real Estate Investment Trust has net debt of 12.38 times its 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. With EBIT of 1.86 times its interest expense, Pro 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.

Dividend Volatility

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. Pro Real Estate Investment Trust 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. Its most recent annual dividend was CA$0.63 per share, effectively flat on its first payment six years ago.

We like that the dividend hasn’t been shrinking. However we’re conscious that the company hasn’t got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Pro Real Estate Investment Trust’s earnings per share have shrunk at 20% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Pro Real Estate Investment Trust’s earnings per share, which support the dividend, have been anything but stable.

We’d also point out that Pro Real Estate Investment Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.

Conclusion

To summarise, shareholders should always check that Pro Real Estate Investment Trust’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 its high payout ratio, although at least the dividend was covered by free cash flow. Unfortunately, there hasn’t been any earnings growth, and the company’s dividend history has been too short for us to evaluate the consistency of the dividend. There are a few too many issues for us to get comfortable with Pro Real Estate Investment Trust from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 3 analysts we track are forecasting for the future.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 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.