Does Senior Housing Properties Trust (NASDAQ:SNH) Have A Place In Your Dividend Stock Portfolio?

Could Senior Housing Properties Trust (NASDAQ:SNH) 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. On the other hand, investors have been known to buy a 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 Senior Housing Properties Trust. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Senior Housing Properties Trust for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Senior Housing Properties Trust pays a dividend, it reported a loss over the last year. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

Senior Housing Properties 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.

REITs like Senior Housing Properties Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.

Is Senior Housing Properties Trust's Balance Sheet Risky?

As Senior Housing Properties Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. 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 is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 6.65 times its EBITDA, Senior Housing Properties Trust could be described as a highly leveraged company. While some companies can handle this level of leverage, we'd be concerned about the dividend sustainability if there was any risk of an earnings downturn.

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 1.53 times its interest expense, Senior Housing Properties 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. That said, Senior Housing Properties Trust is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.

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 Senior Housing Properties Trust's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$1.40 in 2009, compared to US$0.60 last year. The dividend has shrunk at around 8.1% a year during that period. Senior Housing Properties Trust's dividend has been cut sharply at least once, so it hasn't fallen by 8.1% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Senior Housing Properties Trust for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Senior Housing Properties Trust has grown its earnings per share at 2.3% per annum over the past five years. Senior Housing Properties Trust's earnings per share have barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Conclusion

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, we think Senior Housing Properties Trust is paying out an acceptable percentage of its cashflow and profit. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. In sum, we find it hard to get excited about Senior Housing Properties Trust from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 Senior Housing Properties Trust analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.