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Today we'll take a closer look at Kite Realty Group Trust (NYSE:KRG) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for Kite Realty Group Trust. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Kite Realty Group Trust for its dividend, and we'll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Kite Realty Group Trust pays a dividend, it was loss-making during the past year. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
Kite Realty Group Trust paid out 112% of its free cash flow last year, which we think is concerning if cash flows do not improve.
It is worth considering that Kite Realty Group Trust is a Real Estate Investment Trust (REIT). REITs have different rules governing their payments, and are often required to pay out a high portion of their earnings to investors.
Is Kite Realty Group Trust's Balance Sheet Risky?
As Kite Realty Group Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Kite Realty Group Trust has net debt of 7.36 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. With EBIT of 1.25 times its interest expense, Kite Realty Group Trust's interest cover is starting to look a bit thin. 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.
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. Kite Realty Group Trust has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$3.28 in 2009, compared to US$1.27 last year. This works out to be a decline of approximately 9.1% per year over that time. Kite Realty Group Trust's dividend hasn't shrunk linearly at 9.1% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Kite Realty Group Trust for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Kite Realty Group Trust has grown its earnings per share at 6.7% per annum over the past five years. The rate at which earnings have grown is quite decent, and by paying out more than half of its earnings as dividends, the company is striking a reasonable balance between reinvestment and returns to shareholders.
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think Kite Realty Group Trust has an acceptable payout ratio, although its dividend was not well covered by cashflow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. With this information in mind, we think Kite Realty Group Trust may not be an ideal dividend stock.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 5 Kite Realty Group Trust analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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.