Consider This Before Buying GCP Student Living plc (LON:DIGS) For The 3.7% Dividend

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Dividend paying stocks like GCP Student Living plc (LON:DIGS) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. 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 GCP Student Living is a new dividend aristocrat in the making. We’d agree the yield does look enticing. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

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LSE:DIGS Historical Dividend Yield, July 18th 2019
LSE:DIGS Historical Dividend Yield, July 18th 2019

Payout ratios

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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. GCP Student Living paid out 104% 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.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 104%, GCP Student Living’s dividend payments are poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given GCP Student Living’s payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

It is worth considering that GCP Student Living is a Real Estate Investment Trust (REIT). REITs have different rules governing their payments, and are often required to pay out a high portion of their earnings to investors.

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. Looking at the data, we can see that GCP Student Living has been paying a dividend for the past five years. During the past five-year period, the first annual payment was UK£0.054 in 2014, compared to UK£0.061 last year. Dividends per share have grown at approximately 2.5% per year over this time.

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

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. It’s good to see GCP Student Living has been growing its earnings per share at 18% a year over the past 5 years. Although earnings per share are up nicely GCP Student Living is paying out 104% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

We’d also point out that GCP Student Living 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

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. We’re a bit uncomfortable with GCP Student Living paying out a high percentage of both its cashflow and earnings. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. Overall, GCP Student Living falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

See if management have their own wealth at stake, by checking insider shareholdings in GCP Student Living 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 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.