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Wednesday, August 28, 2013
The Safety Net: A Beaten-Down
REIT With a Safe 5.3% Yield
Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
|  The past few months have not been good to Associated Estates Realty Corp. (NYSE: AEC) shareholders.
The stock fell in May when the company announced it was offering 6.5 million shares to the public, and it slid again last month on an earnings miss.
But for those investors who are more concerned with the dividend and are in it for the long term, there should be little to worry about.
In July, Associated Estates reported second quarter earnings of $0.31 per share, a penny shy of Wall Street's estimates. Although revenue grew over 7% to $45.6 million, it also came in slightly below the consensus estimate of $45.72 million.
But as you may know from reading this column, when it comes to analyzing the safety of the dividend, earnings don't matter much. What we look at is cash flow.
Earnings are a component of cash flow. And over the long term, stock prices follow earnings, so of course we want to see strong earnings, but as far as analyzing the dividend, it's all about how much cash the company generates and whether it's enough to cover the dividend.
In Associated Estate's case, the answer is a resounding yes.
In the first six months of the year, funds from operations (FFO), a measure of cash flow used by real estate investment trusts (REITs), was $0.62 per share. The company has paid out $0.38 per share in dividends for a payout ratio of 61%, well within my comfort zone.
Generally speaking, I want to see a payout ratio of 75% or lower. That gives the company some room to continue to pay the dividend even if it suffers through a bad year or two.
Furthermore, management expects FFO to increase in the second half so that the total for the full year will be $1.26 to $1.30. Assuming the dividend remains the same at $0.19 per quarter, and FFO comes in at the low end of guidance, the payout ratio will fall to 60%.
There's no reason to believe that the apartment landlord won't make its numbers. CEO Jeffrey Friedman recently said, "We're full and rents are growing quite nicely."
From 2003 to 2012, Associated Estates kept its dividend steady at $0.17 per quarter. In April of last year, it raised the dividend by a penny. It boosted the dividend by another penny this past January.
View larger image
As you can see from the chart, Associated Estates has always managed its dividend well, paying between 50% to 60% of funds from operations out to shareholders.
Should FFO continue to move higher over the next few years, which I believe will happen, look for the company to raise the dividend again.
Associated Estates is a good example of a stock that got punished for not meeting Wall Street's short-term expectations. The 5.3% dividend yield will likely be attractive to income investors. For those who have their eye on the long term, they shouldn't have anything to worry about when it comes to the dividend.
Dividend Safety Rating: A
If you have a stock whose dividend safety you'd like me to analyze, leave the ticker symbol in the comment section below.
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