Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Far East Hospitality Trust (SGX:Q5T) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 6th of August, you won't be eligible to receive this dividend, when it is paid on the 13th of September.
Far East Hospitality Trust's upcoming dividend is S$0.0091 a share, following on from the last 12 months, when the company distributed a total of S$0.04 per share to shareholders. Calculating the last year's worth of payments shows that Far East Hospitality Trust has a trailing yield of 5.8% on the current share price of SGD0.685. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Far East Hospitality Trust is paying out an acceptable 62% of its profit, a common payout level among most companies. While Far East Hospitality Trust 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. 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 73% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Far East Hospitality Trust'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 with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Far East Hospitality Trust's 11% per annum decline in earnings in 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. In the last 6 years, Far East Hospitality Trust has lifted its dividend by approximately 11% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
To Sum It Up
Is Far East Hospitality Trust worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least Far East Hospitality Trust's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Far East Hospitality Trust.
Curious what other investors think of Far East Hospitality Trust? See what analysts 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.
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 firstname.lastname@example.org. 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.