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Today we'll take a closer look at NorthWest Healthcare Properties Real Estate Investment Trust (TSE:NWH.UN) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
In this case, NorthWest Healthcare Properties Real Estate Investment Trust likely looks attractive to dividend investors, given its 6.7% dividend yield and four-year payment history. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying NorthWest Healthcare Properties Real Estate Investment Trust for its dividend - read on to learn more.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. NorthWest Healthcare Properties Real Estate Investment Trust paid out 87% of its profit as dividends, over the trailing twelve month period. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 83% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
It is worth considering that NorthWest Healthcare Properties Real Estate Investment 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 NorthWest Healthcare Properties Real Estate Investment Trust's Balance Sheet Risky?
As NorthWest Healthcare Properties Real Estate Investment Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. 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. NorthWest Healthcare Properties Real Estate Investment Trust has net debt of 11.33 times its EBITDA, which we think carries substantial risk if earnings aren't sustainable.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. With EBIT of 1.81 times its interest expense, NorthWest Healthcare Properties Real Estate Investment Trust's interest cover is starting to look a bit thin. 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.
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. NorthWest Healthcare Properties Real Estate Investment Trust has been paying a dividend for the past four years. Its most recent annual dividend was CA$0.80 per share, effectively flat on its first payment four years ago.
We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Over the past five years, it looks as though NorthWest Healthcare Properties Real Estate Investment Trust's EPS have declined at around 19% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
We'd also point out that NorthWest Healthcare Properties Real Estate Investment 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. First, we think NorthWest Healthcare Properties Real Estate Investment Trust is paying out an acceptable percentage of its cashflow and profit. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. With this information in mind, we think NorthWest Healthcare Properties Real Estate Investment Trust may not be an ideal dividend stock.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in NorthWest Healthcare Properties Real Estate Investment Trust stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.