Readers hoping to buy Preferred Apartment Communities, Inc. (NYSE:APTS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 12th of September will not receive the dividend, which will be paid on the 15th of October.
Preferred Apartment Communities's upcoming dividend is US$0.26 a share, following on from the last 12 months, when the company distributed a total of US$1.05 per share to shareholders. Based on the last year's worth of payments, Preferred Apartment Communities has a trailing yield of 7.4% on the current stock price of $14.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Preferred Apartment Communities paid out a disturbingly high 230% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Preferred Apartment Communities's payout ratio is still too high, and we wonder if the dividend is being funded by debt. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out more than three-quarters (95%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Preferred Apartment Communities reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Preferred Apartment Communities also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 8 years, Preferred Apartment Communities has lifted its dividend by approximately 9.7% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
To Sum It Up
Is Preferred Apartment Communities an attractive dividend stock, or better left on the shelf? It's hard to get used to Preferred Apartment Communities paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. 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 Preferred Apartment Communities? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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