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Dividend paying stocks like Columbia Property Trust, Inc. (NYSE:CXP) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. 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 five-year payment history and a 3.7% yield, many investors probably find Columbia Property Trust intriguing. It sure looks interesting on these metrics – but there’s always more to the story . The company also bought back stock equivalent to around 1.8% of market capitalisation this year. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. In the last year, Columbia Property Trust paid out 46% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Columbia Property Trust paid out 80% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It’s positive to see that Columbia Property Trust’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Columbia Property Trust’s Balance Sheet Risky?
As Columbia Property 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 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). Columbia Property Trust has net debt of 9.98 times its earnings before interest, tax, depreciation and amortisation (EBITDA) which implies meaningful risk if interest rates rise of earnings decline.
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 1.23 times its interest expense, Columbia Property 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.
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 Columbia Property Trust has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$1.20 in 2014, compared to US$0.80 last year. This works out to be a decline of approximately 7.8% per year over that time. Columbia Property Trust’s dividend hasn’t shrunk linearly at 7.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Columbia Property Trust for its dividend, given that payments have shrunk over the past five 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. In the last five years, Columbia Property Trust’s earnings per share have shrunk at approximately 13% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
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. Firstly, we like that Columbia Property Trust pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. 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. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Columbia Property Trust out there.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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 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.