Today we’ll take a closer look at CoreSite Realty Corporation (NYSE:COR) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a eight-year payment history and a 4.2% yield, many investors probably find CoreSite Realty intriguing. We’d agree the yield does look enticing. Some simple research can reduce the risk of buying CoreSite Realty for its dividend – read on to learn more.
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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. In the last year, CoreSite Realty paid out 82% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. CoreSite Realty paid out 75% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances.
CoreSite Realty 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 CoreSite Realty’s Balance Sheet Risky?
As CoreSite Realty has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and 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). CoreSite Realty is carrying net debt of 4.98 times its EBITDA, which is getting towards the upper limit of our comfort range on a dividend stock that the investor hopes will endure a wide range of economic circumstances.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for CoreSite Realty, and be aware that lenders may place additional restrictions on the company as well.
Consider getting our latest analysis on CoreSite Realty’s financial position here.
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. The first recorded dividend for CoreSite Realty, in the last decade, was eight years ago. The company has been paying a stable dividend for a while now, which is great. However we’d prefer to see consistency for a few more years before giving it our full seal of approval. During the past eight-year period, the first annual payment was US$0.52 in 2011, compared to US$4.88 last year. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time.
CoreSite Realty has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
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 CoreSite Realty has grown its earnings per share at 34% per annum over the past five years. CoreSite Realty 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.
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. CoreSite Realty’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Ultimately, CoreSite Realty 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.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 16 analysts we track are forecasting for CoreSite Realty for free with public 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 firstname.lastname@example.org. 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.