With its stock down 5.9% over the past month, it is easy to disregard Hudson Pacific Properties (NYSE:HPP). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Hudson Pacific Properties' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hudson Pacific Properties is:
2.8% = US$107m ÷ US$3.8b (Based on the trailing twelve months to March 2020).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Hudson Pacific Properties' Earnings Growth And 2.8% ROE
As you can see, Hudson Pacific Properties' ROE looks pretty weak. Not just that, even compared to the industry average of 5.5%, the company's ROE is entirely unremarkable. In spite of this, Hudson Pacific Properties was able to grow its net income considerably, at a rate of 37% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Hudson Pacific Properties' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Hudson Pacific Properties is trading on a high P/E or a low P/E, relative to its industry.
Is Hudson Pacific Properties Efficiently Re-investing Its Profits?
Hudson Pacific Properties seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 51%, meaning the company retains only 49% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.
Additionally, Hudson Pacific Properties has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 52%. However, Hudson Pacific Properties' future ROE is expected to decline to 1.4% despite there being not much change anticipated in the company's payout ratio.
Overall, we feel that Hudson Pacific Properties certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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