Could Vitalharvest Freehold Trust (ASX:VTH) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
Some readers mightn't know much about Vitalharvest Freehold Trust's 4.2% dividend, as it has only been paying distributions for a year or so. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Vitalharvest Freehold Trust currently pays a dividend. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
Vitalharvest Freehold Trust paid out 126% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow.
REITs like Vitalharvest Freehold Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is Vitalharvest Freehold Trust's Balance Sheet Risky?
As Vitalharvest Freehold 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). With net debt of 6.38 times its EBITDA, Vitalharvest Freehold Trust could be described as a highly leveraged company. While some companies can handle this level of leverage, we'd be concerned about the dividend sustainability if there was any risk of an earnings downturn.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Vitalharvest Freehold Trust has interest cover of less than 1 - which suggests its earnings are not high enough to cover even the interest payments on its debt. This is potentially quite serious, and we would likely avoid the stock if it were not resolved quickly. Low interest cover and high debt can create problems right when the investor least needs them, and we're reluctant to rely on the dividend of companies with these traits. That said, Vitalharvest Freehold Trust is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.
Remember, you can always get a snapshot of Vitalharvest Freehold Trust's latest financial position, by checking our visualisation of its financial health.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. This works out to a decline of approximately 59% over that time.
We struggle to make a case for buying Vitalharvest Freehold Trust for its dividend, given that payments have shrunk over the past one years.
To summarise, shareholders should always check that Vitalharvest Freehold Trust's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Vitalharvest Freehold Trust gets a pass on its dividend payout ratio, but it paid out virtually all of its cash flow as dividends. This may just be a one-off, but we'd keep an eye on this. Unfortunately, there hasn't been any earnings growth, and the company's dividend history is shorter than the 10 years we ideally like to see before making a strong judgement. With this information in mind, we think Vitalharvest Freehold Trust may not be an ideal dividend stock.
See if management have their own wealth at stake, by checking insider shareholdings in Vitalharvest Freehold Trust stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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