Are Strong Financial Prospects The Force That Is Driving The Momentum In Piedmont Office Realty Trust, Inc.'s NYSE:PDM) Stock?
Piedmont Office Realty Trust's (NYSE:PDM) stock is up by a considerable 26% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Piedmont Office 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Piedmont Office Realty Trust
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Piedmont Office Realty Trust is:
19% = US$373m ÷ 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 $0.19.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Piedmont Office Realty Trust's Earnings Growth And 19% ROE
To begin with, Piedmont Office Realty Trust seems to have a respectable ROE. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. Probably as a result of this, Piedmont Office Realty Trust was able to see an impressive net income growth of 21% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Piedmont Office 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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is PDM fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Piedmont Office Realty Trust Using Its Retained Earnings Effectively?
The three-year median payout ratio for Piedmont Office Realty Trust is 48%, which is moderately low. The company is retaining the remaining 52%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Piedmont Office Realty Trust is reinvesting its earnings efficiently.
Moreover, Piedmont Office 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 45%. However, Piedmont Office Realty Trust's future ROE is expected to decline to 2.1% despite there being not much change anticipated in the company's payout ratio.
Conclusion
On the whole, we feel that Piedmont Office Realty Trust's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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