Senior Housing Properties Trust (NASDAQ:SNH) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 26th of July, you won't be eligible to receive this dividend, when it is paid on the 15th of August.
Senior Housing Properties Trust's next dividend payment will be US$0.15 per share, and in the last 12 months, the company paid a total of US$0.60 per share. Looking at the last 12 months of distributions, Senior Housing Properties Trust has a trailing yield of approximately 7.4% on its current stock price of $8.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Senior Housing Properties Trust paid out 108% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. A useful secondary check can be to evaluate whether Senior Housing Properties Trust generated enough free cash flow to afford its dividend. The company paid out 106% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
As Senior Housing Properties Trust's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Senior Housing Properties Trust's 19% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Senior Housing Properties Trust has seen its dividend decline 8.1% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
The Bottom Line
Should investors buy Senior Housing Properties Trust for the upcoming dividend? Not only are earnings per share declining, but Senior Housing Properties Trust is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
Curious what other investors think of Senior Housing Properties Trust? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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