Agree Realty Corporation (NYSE:ADC) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 26th of September in order to be eligible for this dividend, which will be paid on the 11th of October.
Agree Realty's next dividend payment will be US$0.6 per share, on the back of last year when the company paid a total of US$2.3 to shareholders. Looking at the last 12 months of distributions, Agree Realty has a trailing yield of approximately 3.1% on its current stock price of $73.4. 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 investigate whether Agree Realty can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Agree Realty paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. While Agree Realty 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. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 68% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Agree Realty's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Agree Realty, with earnings per share up 5.2% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
We'd also point out that Agree Realty issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Agree Realty has delivered an average of 1.3% per year annual increase in its dividend, based on the past ten years of dividend payments.
Is Agree Realty worth buying for its dividend? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. In summary, it's hard to get excited about Agree Realty from a dividend perspective.
Curious what other investors think of Agree Realty? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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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