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Could STAG Industrial, Inc. (NYSE:STAG) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.
In this case, STAG Industrial likely looks attractive to dividend investors, given its 4.7% dividend yield and eight-year payment history. It sure looks interesting on these metrics - but there's always more to the story . Some simple analysis can reduce the risk of holding STAG Industrial for its dividend, and we'll focus on the most important aspects below.
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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, STAG Industrial paid out 84% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. STAG Industrial paid out 198% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. While STAG Industrial's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to STAG Industrial's ability to maintain its dividend.
Is STAG Industrial's Balance Sheet Risky?
As STAG Industrial has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures a company's total debt load relative to its earnings (lower = less debt), while net interest cover measures the company's ability to pay the interest on its debt (higher = greater ability to pay interest costs). With net debt of more than 5x EBITDA, STAG Industrial could be described as a highly leveraged company. While some companies can handle this level of leverage, we'd be concerned about the dividend sustainability if there was any risk of an earnings downturn.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for STAG Industrial, and be aware that lenders may place additional restrictions on the company as well. Low interest cover and high debt can create problems right when the investor least needs them. We're generally reluctant to rely on the dividend of companies with these traits.
Consider getting our latest analysis on STAG Industrial's financial position here.
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 last decade of data, we can see that STAG Industrial paid its first dividend at least eight years ago. The dividend has been quite stable over the past eight 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 eight-year period, the first annual payment was US$1.04 in 2011, compared to US$1.43 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.1% a year over that time.
Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It's good to see STAG Industrial has been growing its earnings per share at 60% a year over the past 5 years. A majority of profits are being paid out as dividends, which raises the question of what happens to the current dividend if earnings decline. However, the rapid growth in earnings may indicate that is less of a risk.
We'd also point out that STAG Industrial 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.
To summarise, shareholders should always check that STAG Industrial's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, the company has a payout ratio that was within an average range for most dividend stocks, but it paid out virtually all of its generated cash flow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. In sum, we find it hard to get excited about STAG Industrial from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 STAG Industrial analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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 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.