Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll take a closer look at Rexford Industrial Realty, Inc. (NYSE:REXR) from a dividend investor’s perspective. Owning a strong dividend company 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 2.0% yield and a five-year payment history, investors probably think Rexford Industrial Realty looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. There are a few simple ways to reduce the risks of buying Rexford Industrial Realty for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
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. Looking at the data, we can see that 60% of Rexford Industrial Realty’s profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend 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. Rexford Industrial Realty paid out 146% of its free cash flow last year, which we think is a risk if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.
Rexford Industrial 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 Rexford Industrial Realty’s Balance Sheet Risky?
As Rexford Industrial 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). Rexford Industrial Realty is carrying net debt of 4.40 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.
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 2.19 times its interest expense, Rexford Industrial Realty’s interest cover is starting to look a bit thin.
We update our data on Rexford Industrial Realty every 24 hours, so you can always get our latest analysis of its financial health, 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. Rexford Industrial Realty has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.36 in 2014, compared to US$0.74 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time.
Rexford Industrial 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
Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if 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. It’s good to see Rexford Industrial Realty has been growing its earnings per share at 61% a year over the past 5 years. Earnings per share are sharply up, but we wonder if paying out more than half its earnings (leaving less for reinvestment) is an implicit signal that Rexford Industrial Realty’s growth will be slower in the future.
We’d also point out that Rexford Industrial Realty issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
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 Rexford Industrial Realty has an acceptable payout ratio, although its dividend was not 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. In sum, we find it hard to get excited about Rexford Industrial Realty from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Rexford Industrial Realty stock.
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.