Most readers would already know that Lexington Realty Trust's (NYSE:LXP) stock increased by 3.0% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Lexington Realty Trust's ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Lexington Realty Trust is:
8.7% = US$167m ÷ US$1.9b (Based on the trailing twelve months to September 2020).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Lexington Realty Trust's Earnings Growth And 8.7% ROE
When you first look at it, Lexington Realty Trust's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.4% doesn't go unnoticed by us. Especially when you consider Lexington Realty Trust's exceptional 27% 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. Hence, there might be some other aspects that are causing earnings to grow. 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.
We then compared Lexington Realty Trust's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LXP fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Lexington Realty Trust Using Its Retained Earnings Effectively?
Lexington Realty Trust has a very high three-year median payout ratio of 71%. This means that it has only 29% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings have grown significantly as we saw above.
Moreover, Lexington Realty Trust 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 57% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 9.4%.
In total, it does look like Lexington Realty Trust has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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What are the risks and opportunities for LXP Industrial Trust?
Trading at 41.3% below our estimate of its fair value
Revenue is forecast to grow 10.93% per year
Earnings grew by 51.6% over the past year
Earnings are forecast to decline by an average of 51.2% per year for the next 3 years
Interest payments are not well covered by earnings
Large one-off items impacting financial results
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. 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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LXP Industrial Trust
Lexington Realty Trust (NYSE: LXP) is a publicly traded real estate investment trust (REIT) that owns a portfolio of real estate assets consisting primarily of equity investments in single-tenant net-leased industrial properties across the United States.
Undervalued with proven track record and pays a dividend.