The RMR Group Inc. (NASDAQ:RMR) has announced that it will pay a dividend of US$0.38 per share on the 19th of August. The dividend yield is 4.0% based on this payment, which is a little bit low compared to the other companies in the industry.
RMR Group Doesn't Earn Enough To Cover Its Payments
If it is predictable over a long period, even low dividend yields can be attractive. Before this announcement, RMR Group was paying out 93% of earnings, but a comparatively small 75% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
The next 12 months is set to see EPS grow by 10.6%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 102%, which probably can't continue putting some pressure on the balance sheet.
RMR Group Doesn't Have A Long Payment History
It is great to see that RMR Group has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2016, the dividend has gone from US$1.00 to US$1.52. This works out to be a compound annual growth rate (CAGR) of approximately 8.7% a year over that time. The dividend has been growing as a reasonable rate, which we like. However, investors will probably want to see a longer track record before they consider RMR Group to be a consistent dividend paying stock.
Dividend Growth May Be Hard To Achieve
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, things aren't all that rosy. RMR Group has seen earnings per share falling at 3.0% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for RMR Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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What are the risks and opportunities for RMR Group?
Trading at 53.8% below our estimate of its fair value
Earnings are forecast to grow 5.25% per year
No risks detected for RMR from our risks checks.
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