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Dividend paying stocks like Global Self Storage, Inc. (NASDAQ:SELF) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested 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.
With a five-year payment history and a 6.4% yield, many investors probably find Global Self Storage intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Global Self Storage for its dividend, and we'll go through these 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Global Self Storage paid out 103% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 86% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It's good to see that while Global Self Storage's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
REITs like Global Self Storage often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is Global Self Storage's Balance Sheet Risky?
As Global Self Storage's dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. Global Self Storage has net debt of 6.28 times its EBITDA, which implies meaningful risk if interest rates rise of earnings decline.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Interest cover of 1.63 times its interest expense is starting to become a concern for Global Self Storage, and be aware that lenders may place additional restrictions on the company as well. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company's dividend while these metrics persist.
We update our data on Global Self Storage every 24 hours, so you can always get our latest analysis of its financial health, here.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Global Self Storage has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.35 in 2014, compared to US$0.26 last year. This works out to be a decline of approximately 5.8% per year over that time. Global Self Storage's dividend has been cut sharply at least once, so it hasn't fallen by 5.8% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Global Self Storage for its dividend, given that payments have shrunk over the past five years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's not great to see that Global Self Storage's have fallen at approximately 12% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
To summarise, shareholders should always check that Global Self Storage's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Global Self Storage paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Global Self Storage's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Global Self Storage from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Now, if you want to look closer, it would be worth checking out our free research on Global Self Storage management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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.