Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Could Universal Health Realty Income Trust (NYSE:UHT) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
With Universal Health Realty Income Trust yielding 3.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It’s likely that plenty of investors have purchased it for the income. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.Explore this interactive chart for our latest analysis on Universal Health Realty Income Trust!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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 83% of Universal Health Realty Income Trust’s profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 86% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn.
Universal Health Realty Income Trust 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 Universal Health Realty Income Trust’s Balance Sheet Risky?
As Universal Health Realty Income Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) 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). Universal Health Realty Income Trust has net debt of more than 3x its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for Universal Health Realty Income Trust, and be aware that lenders may place additional restrictions on the company as well.
We update our data on Universal Health Realty Income Trust every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of Universal Health Realty Income Trust’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$2.38 in 2009, compared to US$2.70 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year over that time.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Earnings have grown at around 5.7% a year for the past five years, which is better than seeing them shrink! EPS have been growing at a reasonable rate, although with most of the profits being paid out to shareholders, we question if the company will be able to keep growing its dividends in the future.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Universal Health Realty Income Trust’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. Earnings growth has been limited, but we like that the dividend payments have been fairly consistent. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Universal Health Realty Income Trust out there.
See if management have put their money where their mouth is, by checking insider shareholdings in Universal Health Realty Income Trust stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 firstname.lastname@example.org. 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.