Highwoods Properties, Inc.'s (NYSE:HIW) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 2.2% over the past month, it is easy to disregard Highwoods Properties (NYSE:HIW). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Highwoods Properties' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Highwoods Properties

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Highwoods Properties is:

9.9% = US$246m ÷ US$2.5b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Highwoods Properties' Earnings Growth And 9.9% ROE

When you first look at it, Highwoods Properties' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.6% which we definitely can't overlook. Even more so after seeing Highwoods Properties' exceptional 21% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Highwoods Properties' growth is quite high when compared to the industry average growth of 8.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is HIW fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Highwoods Properties Efficiently Re-investing Its Profits?

Highwoods Properties seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 53%, meaning the company retains only 47% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Moreover, Highwoods Properties is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Still, forecasts suggest that Highwoods Properties' future ROE will drop to 6.6% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Highwoods Properties has some positive aspects to its business. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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