Could Office Properties Income Trust (NASDAQ:OPI) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. 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.
In this case, Office Properties Income Trust likely looks attractive to investors, given its 8.3% dividend yield and a payment history of over ten years. It’s likely that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Office Properties Income Trust for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
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. Although Office Properties Income Trust pays a dividend, it was loss-making during the past year. 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.
As a loss-making company, we can also measure Office Properties Income Trust’s dividend payments against its levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 118%, Office Properties Income Trust’s dividend payments are poorly covered by cash flow.
Office Properties Income Trust pays out most of its earnings, although companies in the real estate industry often have different rules governing their dividends.
Is Office Properties Income Trust’s Balance Sheet Risky?As Office Properties Income Trust’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress.
A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). Office Properties Income Trust has net debt of greater than 10x its earnings before interest, tax, depreciation and amortisation (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 less than 1 times its interest expense, Office Properties Income Trust’s financial situation is potentially quite concerning. Readers should investigate whether it might be at risk of breaching the minimum requirements on its loans. Low interest cover and high debt can create problems right when the investor least needs them. We’re generally reluctant to rely on the dividend of companies with these traits.
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. Office Properties Income Trust has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was US$6.40 in 2009, compared to US$2.20 last year. This works out to a decline of approximately 66% over that time.
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. Office Properties Income Trust’s EPS have fallen by approximately -1.4% per year. A modest decline in earnings per share is not great to see, but it doesn’t automatically make a dividend unsustainable. Still, we’d vastly prefer to see EPS growth when researching dividend stocks.
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. Office Properties Income Trust paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Office Properties Income 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.
Given that earnings are not growing, the dividend does not look nearly so attractive. See if the 5 analysts are forecasting a turnaround in our free collection of analyst estimates here.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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If you spot an error that warrants correction, please contact the editor at email@example.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.