Is Summit Industrial Income REIT (TSE:SMU.UN) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
A high yield and a long history of paying dividends is an appealing combination for Summit Industrial Income REIT. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Summit Industrial Income REIT for its dividend, and we’ll go through these below.
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Summit Industrial Income REIT paid out 75% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Summit Industrial Income REIT paid out 155% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Summit Industrial Income REIT paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Summit Industrial Income REIT’s ability to maintain its dividend.
REITs like Summit Industrial Income REIT often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
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. For the purpose of this article, we only scrutinise the last decade of Summit Industrial Income REIT’s dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was CA$2.28 in 2009, compared to CA$0.54 last year. This works out to a decline of approximately 76% over that time.
A shrinking dividend over a ten-year period is not ideal, and we’d be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
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. In the last five years, Summit Industrial Income REIT’s earnings per share have shrunk at approximately 5.1% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
We’d also point out that Summit Industrial Income REIT 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.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. Using these criteria, Summit Industrial Income REIT looks quite suboptimal from a dividend investment perspective.
See if management have their own wealth at stake, by checking insider shareholdings in Summit Industrial Income REIT stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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