Dividend paying stocks like Ashford Hospitality Trust, Inc. (NYSE:AHT) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A high yield and a long history of paying dividends is an appealing combination for Ashford Hospitality Trust. It would not be a surprise to discover that many investors buy it for the dividends. Remember though, given the recent drop in its share price, Ashford Hospitality Trust's yield will look higher, even though the market may now be expecting a decline in its long-term prospects. 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.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Ashford Hospitality Trust pays a dividend, it reported a loss over the last year. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Ashford Hospitality Trust paid out 51% of its cash flow as dividends last year, which is within a reasonable range for the average corporation.
It is worth considering that Ashford Hospitality Trust is a Real Estate Investment Trust (REIT). REITs have different rules governing their payments, and are often required to pay out a high portion of their earnings to investors.
Is Ashford Hospitality Trust's Balance Sheet Risky?
As Ashford Hospitality Trust's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With a net debt to EBITDA ratio of 10.54 times, Ashford Hospitality Trust is very highly levered. While this debt might be serviceable, we would still say it carries substantial risk for the investor who hopes to live on the dividend.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Ashford Hospitality Trust has interest cover of less than 1 - which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company's dividend while these metrics persist.
We update our data on Ashford Hospitality Trust every 24 hours, so you can always get our latest analysis of its financial health, here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Ashford Hospitality Trust has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was US$0.84 in 2009, compared to US$0.24 last year. This works out to a decline of approximately 71% over that time.
A shrinking dividend over a ten-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Ashford Hospitality Trust's EPS have declined at around 37% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Ashford Hospitality Trust's earnings per share, which support the dividend, have been anything but stable.
We'd also point out that Ashford Hospitality Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Ashford Hospitality Trust paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. In this analysis, Ashford Hospitality Trust doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 5 analysts we track are forecasting for the future.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.