Could Braemar Hotels & Resorts, Inc. (NYSE:BHR) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. 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.
In this case, Braemar Hotels & Resorts likely looks attractive to dividend investors, given its 4.9% dividend yield and five-year payment history. It sure looks interesting on these metrics – but there’s always more to the story . Given the recent spike in its share price, Braemar Hotels & Resorts’s yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.Explore this interactive chart for our latest analysis on Braemar Hotels & Resorts!
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Braemar Hotels & Resorts 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.
As a loss-making company, we can also measure Braemar Hotels & Resorts’s dividend payments against its levered free cash flow, to see if enough cash was generated to cover the dividend. Of the levered free cash flow it generated last year, Braemar Hotels & Resorts paid out 43% as dividends, suggesting the dividend is affordable.
Braemar Hotels & Resorts 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.
Is Braemar Hotels & Resorts’s Balance Sheet Risky?As Braemar Hotels & Resorts has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
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 is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. With net debt of more than 5x EBITDA, Braemar Hotels & Resorts 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. Braemar Hotels & Resorts has interest cover of less than 1 – which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. 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. Looking at the data, we can see that Braemar Hotels & Resorts has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.20 in 2014, compared to US$0.64 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time.
The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Braemar Hotels & Resorts has grown its earnings per share at 50% per annum over the past five years. Braemar Hotels & Resorts earnings have been growing very quickly recently, but given that it is paying out more than half of its earnings, we wonder if it will have enough capital to fund further growth in the future.
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 Braemar Hotels & Resorts has an acceptable payout ratio and its dividend is well covered by cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Braemar Hotels & Resorts has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 Braemar Hotels & Resorts 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%.
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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.