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Don't Race Out To Buy Regional REIT Limited (LON:RGL) Just Because It's Going Ex-Dividend

Simply Wall St

It looks like Regional REIT Limited (LON:RGL) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 5th of September in order to be eligible for this dividend, which will be paid on the 15th of October.

Regional REIT's upcoming dividend is UK£0.019 a share, following on from the last 12 months, when the company distributed a total of UK£0.081 per share to shareholders. Looking at the last 12 months of distributions, Regional REIT has a trailing yield of approximately 7.7% on its current stock price of £1.04. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Regional REIT

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Regional REIT paid out 116% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Regional REIT's payout ratio is still too high, and we wonder if the dividend is being funded by debt. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Regional REIT paid out more free cash flow than it generated - 116%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Regional REIT's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:RGL Historical Dividend Yield, September 1st 2019

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Regional REIT's earnings are effectively flat over the past three years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.

We'd also point out that Regional REIT issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Regional REIT has delivered an average of 26% per year annual increase in its dividend, based on the past 3 years of dividend payments.

The Bottom Line

Is Regional REIT worth buying for its dividend? Earnings per share are effectively flat, plus Regional REIT's dividend is not well covered by either earnings or cash flow, which is not great. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Regional REIT? See what the two analysts we track 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.

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 editorial-team@simplywallst.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.