Today we'll take a closer look at Ares Commercial Real Estate Corporation (NYSE:ACRE) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a seven-year payment history and a 8.6% yield, many investors probably find Ares Commercial Real Estate intriguing. We'd agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Ares Commercial Real Estate paid out 94% of its profit as dividends, over the trailing twelve month period. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Ares Commercial Real Estate has been paying a dividend for the past seven years. The dividend has been quite stable over the past seven years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past seven-year period, the first annual payment was US$1.20 in 2012, compared to US$1.32 last year. Dividends per share have grown at approximately 1.4% per year over this time.
It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Ares Commercial Real Estate has grown its earnings per share at 13% per annum over the past five years. Although earnings per share are up nicely Ares Commercial Real Estate is paying out 94% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
To summarise, shareholders should always check that Ares Commercial Real Estate's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, it's not great to see how much of its earnings are being paid as dividends. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Ares Commercial Real Estate out there.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 Ares Commercial Real Estate analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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.