It looks like Apple Hospitality REIT, Inc. (NYSE:APLE) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 1st of August will not receive this dividend, which will be paid on the 15th of August.
Apple Hospitality REIT's next dividend payment will be US$0.10 per share. Last year, in total, the company distributed US$1.20 to shareholders. Based on the last year's worth of payments, Apple Hospitality REIT stock has a trailing yield of around 7.7% on the current share price of $15.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Apple Hospitality REIT paid out more than half (71%) of its earnings last year, which is a regular payout ratio for most companies. While Apple Hospitality REIT 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. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Apple Hospitality REIT'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 that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Apple Hospitality REIT's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Apple Hospitality REIT dividends are largely the same as they were four years ago.
To Sum It Up
From a dividend perspective, should investors buy or avoid Apple Hospitality REIT? While earnings per share are flat, at least Apple Hospitality REIT has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Wondering what the future holds for Apple Hospitality REIT? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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