Yahoo Finance Are AvalonBay Communities, Inc.'s (NYSE:AVB) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
AvalonBay Communities (NYSE:AVB) has had a rough month with its share price down 17%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study AvalonBay Communities' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for AvalonBay Communities
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for AvalonBay Communities is:
10% = US$1.1b ÷ US$11b (Based on the trailing twelve months to March 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
AvalonBay Communities' Earnings Growth And 10% ROE
To begin with, AvalonBay Communities seems to have a respectable ROE. On comparing with the average industry ROE of 6.5% the company's ROE looks pretty remarkable. Despite this, AvalonBay Communities' five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that AvalonBay Communities' reported growth was lower than the industry growth of 11% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is AVB fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is AvalonBay Communities Using Its Retained Earnings Effectively?
AvalonBay Communities has a very high three-year median payout ratio of 72% (or a retention ratio of 28%). However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. So this probably explains the absence of growth in earnings.
In addition, AvalonBay Communities has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. Regardless, AvalonBay Communities' ROE is speculated to decline to 6.7% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we do feel that AvalonBay Communities has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
