Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Retail Value Inc. (NYSE:RVI) is about to go ex-dividend in just 4 days. You can purchase shares before the 25th of November in order to receive the dividend, which the company will pay on the 8th of January.
Retail Value’s next dividend payment will be US$2.05 per share. Last year, in total, the company distributed US$2.05 to shareholders. Based on the last year’s worth of payments, Retail Value has a trailing yield of 5.3% on the current stock price of $38.66. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Retail Value paid out just 4.5% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. While Retail Value seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don’t think this is great, we also don’t think it is unusual. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 7.4% of its free cash flow in the last year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously.
Given that Retail Value has only been paying a dividend for a year, there’s not much of a past history to draw insight from.
The Bottom Line
Should investors buy Retail Value for the upcoming dividend? The company has barely grown earnings per share over this time, but at least it’s paying out a decently low percentage of its earnings and cashflow as dividends. This could suggest management is reinvesting in future growth opportunities. Generally we like to see both low payout ratios and strong earnings per share growth, but Retail Value is halfway there. Retail Value looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
Curious about whether Retail Value has been able to consistently generate growth? Here’s a chart of its historical revenue and earnings growth.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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