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Why It Might Not Make Sense To Buy Tritax Big Box REIT plc (LON:BBOX) For Its Upcoming Dividend

Simply Wall St

It looks like Tritax Big Box REIT plc (LON:BBOX) is about to go ex-dividend in the next 2 days. If you purchase the stock on or after the 25th of July, you won't be eligible to receive this dividend, when it is paid on the 15th of August.

Tritax Big Box REIT's upcoming dividend is UK£0.017 a share, following on from the last 12 months, when the company distributed a total of UK£0.067 per share to shareholders. Looking at the last 12 months of distributions, Tritax Big Box REIT has a trailing yield of approximately 4.3% on its current stock price of £1.593. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Tritax Big Box REIT

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Tritax Big Box REIT paid out 102% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 102% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

As Tritax Big Box REIT's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:BBOX Historical Dividend Yield, July 22nd 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Tritax Big Box REIT earnings per share are up 6.3% per annum over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

Tritax Big Box REIT also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Tritax Big Box REIT has delivered 13% dividend growth per year on average over the past 5 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Tritax Big Box REIT an attractive dividend stock, or better left on the shelf? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Tritax Big Box REIT? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top 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.