Yahoo Finance Do Investors Have Good Reason To Be Wary Of RLJ Lodging Trust's (NYSE:RLJ) 7.9% Dividend Yield?
Is RLJ Lodging Trust (NYSE:RLJ) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a eight-year payment history and a 7.9% yield, many investors probably find RLJ Lodging Trust intriguing. It sure looks interesting on these metrics - but there's always more to the story . The company also bought back stock during the year, equivalent to approximately 1.5% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding RLJ Lodging Trust for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on RLJ Lodging Trust!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. RLJ Lodging Trust paid out 70% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. RLJ Lodging Trust paid out 65% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
REITs like RLJ Lodging Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Is RLJ Lodging Trust's Balance Sheet Risky?
As RLJ Lodging Trust has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). RLJ Lodging Trust has net debt of 3.12 times its EBITDA, which is getting towards the limit of most investors' comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company's net interest expense. Interest cover of 2.95 times its interest expense is starting to become a concern for RLJ Lodging Trust, and be aware that lenders may place additional restrictions on the company as well. That said, RLJ Lodging Trust is in the real estate business, which is typically able to sustain much higher levels of debt, relative to other industries.
Remember, you can always get a snapshot of RLJ Lodging Trust's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The first recorded dividend for RLJ Lodging Trust, in the last decade, was eight years ago. The dividend has been quite stable over the past eight years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past eight-year period, the first annual payment was US$0.60 in 2011, compared to US$1.32 last year. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. In the last five years, RLJ Lodging Trust's earnings per share have shrunk at approximately 2.5% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.
Conclusion
To summarise, shareholders should always check that RLJ Lodging Trust's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think RLJ Lodging Trust is paying out an acceptable percentage of its cashflow and profit. Earnings per share are down, and to our mind RLJ Lodging Trust has not been paying a dividend long enough to demonstrate its resilience across economic cycles. With this information in mind, we think RLJ Lodging Trust may not be an ideal dividend stock.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 10 analysts we track are forecasting for the future.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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.
