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It Might Not Be A Great Idea To Buy Blackwall Property Trust (ASX:BWR) For Its Next Dividend

Simply Wall St

It looks like Blackwall Property Trust (ASX:BWR) is about to go ex-dividend in the next 4 days. You can purchase shares before the 16th of September in order to receive the dividend, which the company will pay on the 8th of October.

Blackwall Property Trust's next dividend payment will be AU$0.035 per share. Last year, in total, the company distributed AU$0.07 to shareholders. Last year's total dividend payments show that Blackwall Property Trust has a trailing yield of 5.5% on the current share price of A$1.28. If you buy this business for its dividend, you should have an idea of whether Blackwall Property Trust's dividend is reliable and sustainable. As a result, readers should always check whether Blackwall Property Trust has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Blackwall Property Trust

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 92% 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. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out dividends equivalent to 248% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Blackwall Property Trust intends to continue funding this dividend, or if it could be forced to the payment.

While Blackwall Property Trust's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Blackwall Property Trust to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Blackwall Property Trust paid out over the last 12 months.

ASX:BWR Historical Dividend Yield, September 11th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Blackwall Property Trust's earnings per share have dropped 27% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Blackwall Property Trust has seen its dividend decline 12% per annum on average over the past 6 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is Blackwall Property Trust an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Bottom line: Blackwall Property Trust has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Want to learn more about Blackwall Property Trust? Here's a visualisation of its historical rate of revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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 editorial-team@simplywallst.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.