First Real Estate Investment Trust (SGX:AW9U) Is Yielding 8.3% – But Is It A Buy?

Could First Real Estate Investment Trust (SGX:AW9U) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.

So you may wish to consider our analysis of First Real Estate Investment Trust’s financial health, here.

A high yield and a long history of paying dividends is an appealing combination for First Real Estate Investment Trust. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding First Real Estate Investment Trust for its dividend, and we’ll focus on the most important aspects below.

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SGX:AW9U Historical Dividend Yield, November 12th 2019
SGX:AW9U Historical Dividend Yield, November 12th 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. 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. First Real Estate Investment Trust paid out 68% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. First Real Estate Investment Trust paid out 68% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.

First 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.

Dividend Volatility

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. For the purpose of this article, we only scrutinise the last decade of First Real Estate Investment Trust’s dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was S$0.078 in 2009, compared to S$0.086 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.0% a year over that time.

Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. First Real Estate Investment Trust’s EPS have fallen by approximately 12% per year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and First Real Estate Investment Trust’s earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that First 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. First, we think First Real Estate Investment Trust is paying out an acceptable percentage of its cashflow and profit. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we’d wonder for how much longer this will be sustainable if earnings continue to decline. Ultimately, First Real Estate Investment Trust comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.

Are management backing themselves to deliver performance? Check their shareholdings in First Real Estate Investment Trust in our latest insider ownership analysis.

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.