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Why It Might Not Make Sense To Buy Pebblebrook Hotel Trust (NYSE:PEB) For Its Upcoming Dividend

Simply Wall St

Pebblebrook Hotel Trust (NYSE:PEB) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 27th of September will not receive this dividend, which will be paid on the 15th of October.

Pebblebrook Hotel Trust's next dividend payment will be US$0.4 per share. Last year, in total, the company distributed US$1.5 to shareholders. Based on the last year's worth of payments, Pebblebrook Hotel Trust stock has a trailing yield of around 5.4% on the current share price of $28. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Pebblebrook Hotel Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Pebblebrook Hotel Trust distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. For regulatory reasons, it's not uncommon to see REITs paying out around 100% of their earnings. However, we feel Pebblebrook Hotel Trust's payout ratio is still too high, and we wonder if the dividend is being funded by debt. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 72% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

NYSE:PEB Historical Dividend Yield, September 22nd 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Pebblebrook Hotel Trust was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Pebblebrook Hotel Trust has lifted its dividend by approximately 14% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Remember, you can always get a snapshot of Pebblebrook Hotel Trust's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

From a dividend perspective, should investors buy or avoid Pebblebrook Hotel Trust? It's hard to get used to Pebblebrook Hotel Trust paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Pebblebrook Hotel Trust.

Wondering what the future holds for Pebblebrook Hotel Trust? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.