Piedmont Office Realty Trust, Inc.'s (NYSE:PDM) Stock Is Going Strong: Is the Market Following Fundamentals?
Piedmont Office Realty Trust's (NYSE:PDM) stock is up by a considerable 13% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Piedmont Office Realty Trust's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Piedmont Office Realty Trust
How Is ROE Calculated?
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 Piedmont Office Realty Trust is:
19% = US$372m ÷ US$1.9b (Based on the trailing twelve months to June 2020).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.19 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Piedmont Office Realty Trust's Earnings Growth And 19% ROE
At first glance, Piedmont Office Realty Trust seems to have a decent ROE. On comparing with the average industry ROE of 5.0% the company's ROE looks pretty remarkable. Probably as a result of this, Piedmont Office Realty Trust was able to see a decent growth of 17% over the last five years.
Next, on comparing with the industry net income growth, we found that Piedmont Office Realty Trust's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is PDM worth today? The intrinsic value infographic in our free research report helps visualize whether PDM is currently mispriced by the market.
Is Piedmont Office Realty Trust Efficiently Re-investing Its Profits?
Piedmont Office Realty Trust has a three-year median payout ratio of 48%, which implies that it retains the remaining 52% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Additionally, Piedmont Office Realty Trust 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 44%. Still, forecasts suggest that Piedmont Office Realty Trust's future ROE will drop to 3.3% even though the the company's payout ratio is not expected to change by much.
Summary
On the whole, we feel that Piedmont Office Realty Trust's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings 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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