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 Alexandria Real Estate Equities, Inc. (NYSE:ARE) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 27th of September will not receive this dividend, which will be paid on the 15th of October.
Alexandria Real Estate Equities's next dividend payment will be US$1.0 per share, on the back of last year when the company paid a total of US$4.0 to shareholders. Last year's total dividend payments show that Alexandria Real Estate Equities has a trailing yield of 2.6% on the current share price of $153.44. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Alexandria Real Estate Equities is paying out an acceptable 51% of its profit, a common payout level among most companies. While Alexandria Real Estate Equities 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. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Alexandria Real Estate Equities'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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Alexandria Real Estate Equities's earnings per share have risen 17% per annum over the last five years. Alexandria Real Estate Equities is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
We'd also point out that Alexandria Real Estate Equities 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. Alexandria Real Estate Equities has delivered 2.3% dividend growth per year on average over the past ten years. Earnings per share have been growing much quicker than dividends, potentially because Alexandria Real Estate Equities is keeping back more of its profits to grow the business.
The Bottom Line
Is Alexandria Real Estate Equities an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Alexandria Real Estate Equities's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 51% and 68% respectively. In summary, while it has some positive characteristics, we're not inclined to race out and buy Alexandria Real Estate Equities today.
Curious what other investors think of Alexandria Real Estate Equities? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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