Whitestone REIT (NYSE:WSR) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 1st of August in order to receive the dividend, which the company will pay on the 13th of August.
Whitestone REIT's next dividend payment will be US$0.095 per share, and in the last 12 months, the company paid a total of US$1.14 per share. Based on the last year's worth of payments, Whitestone REIT has a trailing yield of 8.9% on the current stock price of $12.84. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Whitestone REIT has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Whitestone REIT paid out 115% 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. It's not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. 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. Over the past year it paid out 111% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
As Whitestone REIT'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?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Whitestone REIT's earnings have been skyrocketing, up 22% per annum for the past five years. Whitestone REIT's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Whitestone REIT's dividend payments are broadly unchanged compared to where they were nine years ago.
The Bottom Line
Is Whitestone REIT worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Ever wonder what the future holds for Whitestone REIT? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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