Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Spirit Realty Capital, Inc. (NYSE:SRC) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 27th of September will not receive this dividend, which will be paid on the 15th of October.
Spirit Realty Capital's next dividend payment will be US$0.6 per share, and in the last 12 months, the company paid a total of US$2.5 per share. Calculating the last year's worth of payments shows that Spirit Realty Capital has a trailing yield of 5.2% on the current share price of $48.06. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Spirit Realty Capital can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. While Spirit Realty Capital seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don't think this is great, we also don't think it is unusual. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's positive to see that Spirit Realty Capital's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 Spirit Realty Capital's earnings have been skyrocketing, up 39% per annum for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Spirit Realty Capital has seen its dividend decline 4.4% per annum on average over the past six years, which is not great to see. Spirit Realty Capital is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy Spirit Realty Capital for the upcoming dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Spirit Realty Capital is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
Ever wonder what the future holds for Spirit Realty Capital? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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