It looks like VEREIT, Inc. (NYSE:VER) is about to go ex-dividend in the next 4 days. You can purchase shares before the 27th of September in order to receive the dividend, which the company will pay on the 15th of October.
VEREIT's next dividend payment will be US$0.1 per share, and in the last 12 months, the company paid a total of US$0.6 per share. Calculating the last year's worth of payments shows that VEREIT has a trailing yield of 5.6% on the current share price of $9.8. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! 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. Last year VEREIT paid out 108% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 111% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given VEREIT's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see VEREIT has grown its earnings rapidly, up 65% a year for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. VEREIT has seen its dividend decline 5.6% per annum on average over the past eight years, which is not great to see. VEREIT is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy VEREIT for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how VEREIT intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not that we think VEREIT is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Ever wonder what the future holds for VEREIT? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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