Dividends provide investors with a stable and regular source of income.
While most companies pay out dividends on a quarterly basis, some offer monthly dividend payments.
In this article, I analyze 6 monthly dividend stocks.
1 – Realty Income Corporation (O)
Realty Income (NYSE: O) is a Real Estate Investment Trust that invests in free-standing, single-tenant commercial properties in the United States, Puerto Rico, and the United Kingdom that are subject to NNN (triple net) Leases.
I covered O in an article I wrote about month ago. I highly recommend you check it out to gain a better understanding of why this REIT is so highly rated by investors.
In a nutshell? With 598 consecutive monthly dividend payments and 105 dividend increases since its public listing in 1994, O is a distinguished member of the prestigious S&P 500 Dividend Aristocrat index.
VERDICT: STRONG BUY.
2 – PIMCO Corporate & Income (PTY)
With $1.78 trillion of Assets Under Management (AUM), PIMCO Corporate & Income (NYSE: PTY) is one of the world’s premier fixed income investment firms.
PTY invests 80% of its assets in corporate debt obligations, corporate income-producing securities and income-producing securities of non-corporate issuers (most notably US government and mortgage-backed securities).
Thus, PTY has high exposure to non-agency Mortgage Backed Securities and high yield bonds. The current crisis could see a significant spike in mortgage defaults and corporate bonds which means that PTY could lose big as these investments are not backed by the federal government.
Another challenge facing PTY are the concerns regarding its revenues. As you can see, 2019 Revenues and Net Income are down 48% from 2017.
Until recently, PIMCO’s Free Cash Flow was negative. The company recorded positive Free Cash Flow in 2019, which is encouraging.
Lastly, it is worth nothing that PIMCO has very little debt. This is a good sign as it means they could take on debt to raise liquidity if they need to. PIMCO’s Debt Ratio is 0.20 (excellent) and its Debt to Equity Ratio is 0.25 (excellent).
Despite the challening economic context, PIMCO has maintained its dividend. With an annual payout of $1.56, the current yield is 11.11% and the company has a decent dividend growth history.
It is worth mentioning that PIMCO did not cut its dividend during the 2009 financial crisis. In 2007, the dividend was decreased to $1.3548 per share but it was progressively increased as the company recovered.
VERDICT: BUY for the dividend but monitor the company’s financial performances. At near $15, the stock may already be trading at close to fair value.
3 – Stag Industrial (STAG)
STAG industrial is a REIT focused on the acquistion and operation of single-tenant, industrial properties throughout the USA.
As of December 31, 2019, STAG owns 450 buildings in 38 states with approximately 91.4 million rentable square feet.
STAG has 414 tenants and a 95% occupancy rate. It’s important to note that no single tenant accounts for more than 11.1% of its total annualized rental revenue. Its top tenants include Amazon, Ford Motor Company, Emerson Electric, Hachette Book Group, Schneider Electric USA and the FedEx Corporation.
On the financial front, STAG is doing well:
- 2019 Revenues of $405.95 million are up 85% from $218.63 million in 2015,
- 2019 Net Income of $50.6 million is up considerably from 2015, when it was negative $29 million,
- 2019 FFO of $232 million is up 55% from 2017.
However, from 2016-2019, while Operating Cash Flow increased 72%, Free Cash Flow decreased 39%.
STAG’s Free Cash Flow is lowbecause it is investing and paying off its debt: In 2019, STAG allocated $1.5 billion dollars for debt repayment and $205 million for Capex.
In recent news, STAG confirmed its great financial performances by beating Q1 earnings estimates: STAG reported $62 million of Net Income; $0.42 of net income per share; and $93 million of Cash NOI.
STAG also boasts very low leverage: The Current Ratio is 2.11 (very good), the Debt Ratio is 0.43 (very good), and the Debt to Equity Ratio is 0.78 (good).
STAG’s $1.7 billion of non-current liabilities are well covered by total equity. REITs are usually highly leveraged, due to their legal obligation of distributing 90% of taxable income as dividends, so STAG’s excellent performance in this domain should not be overlooked.
Given the strong financial performance, STAG has maintained its annual dividend payout of $1.4 per share. This payout currently represents a 5.69% yield. STAG’s 78.28% payout ratio is actually on the low end for a REIT so there is room for growth.
The 2.08% 5-year growth rate coupled with the 8 years of consecutive dividend growth suggest that STAG is a reliable dividend stock. As long as the financial performances keep justifying dividend raises, I expect the payout ratio to increase in the coming years to eventually reach 90%.
VERDICT: STRONG BUY due to strong financial performances and a reliable history of dividend growth.
4 – LTC Properties Inc
LTC Properties is a REIT investing in seniors housing and health care. LTC operates primarily through sale-leasebacks, mortgage financing, joint-ventures, construction financing and structured finance solutions including preferred equity, bridge, mezzanine & unitranche lending.
LTC’s portfolio consists of roughly 50% seniors housing and 50% skilled nursing properties. LTC conducts business with 30 operators and has nearly 200 properties spread out over 28 states.
Since the elderly are the group most at risk of getting and succumbing to the coronavirus, many are moving out of care homes. The risk of infection in senior centers is high and many prefer to be closer to their families. It is expected that the move in rate will decrease in the coming months as coronavirus fears linger. However, the long term demand for senior housing remains and business is expected to return to normalcy within a year or so. Even so, senior housing centers will have to implement strict hygiene measures to reassure seniors and their families that their facilities are safe.
On the financial front, LTC’s performances are good:
- 2016-2019 Revenues increased 4.3%;
- 2016-2019 Normalized EBITDA increased 5.5%;
- 2016-2019 Free Cash Flow increased 15.85%.
2018 EPS of 3.89 is up from 2.21 in 2017 and the basic average shares has only increased slightly, which means that shareholder value is not being diluted.
Further, LTC’s Debt Ratios are very good: Current Ratio of 9.99 is exceptional, Debt Ratio of 0.48 is very good and the Debt to Equity Ratio of 0.93 is good. The majority of its $693 million of long term debt will reach maturity after 2026. In sum, LTC has no discernable liabilities problems.
LTC pays an annual dividend of $2.28 per share and currently yields of 6.79%. The payout ratio of 77% is very low for a REIT and will hopefully increase in the coming years. Also, the 5-year growth rate of 2.25% is low.
It is important to note that in 2018 the dividend was reduced from $2.28 to $1.90 per share. Prior to this cut, LTC had increased the dividend every year from 2002 to 2017.
VERDICT: STRONG BUY. Solid financial performance and low leverage suggest this is a good purchase at current valuation.
5 – Main Street Capital Corp (MAIN)
MAIN is a Business development company (BDC) who provides “one-stop” capital solutions to lower middle market companies and debt capital to middle market companies.
Its portfolio includes 182 companies covering 50 industries, so the company is very diversified.
MAIN gets the largest part of its income from loans. MAIN loans money to or invests in private businesses whose annual revenues are in the $10 million to $150 million range. MAIN loans carry an average interest rate of 11% mark, which is very high. The high rates are justified by the fact that lending to smaller businesses is inherently riskier than lending to bigger, more mature corporations.
MAIN also receives dividend payments from the companies in which it owns equity. As of Dec 31st, 2019, MAIN counts 67 equity ownership positions and received $33 million in dividend payments. In addition, MAIN makes money when portfolio companies are sold; In 2019, 4 portfolio companies were sold.
MAIN’s Income Statement reveals inconsistent revenue generation. 2016-2019 Revenues are only up 0.9% while Net Income is down 6.7%. These are hardly encouraging figures, especially considering that 2017 and 2018 revenues increased significantly.
I suspect revenues increased during these years due to shares issuance: Average shares increased from 52 million in 2016 to 56.69 million in 2017 to 60.1 million in 2018. This is useful to raise cash but it is not a sustainable form of financing as it dilutes shareholder value.
While BDCs are known to have high leverage, MAIN apparently is not: Its Debt Ratio of 0.43 and Debt to Equity Ratio of 0.76 are quite good.
In December 2019, MAIN took out $75 million in debt on top of an existing $150 million loan it received in April 2019. This loan, coupled with its revolving credit facility of $740 million, means it has sufficient cash on hand and access to cash to invest and finance its activities.
However, MAIN’s Free Cash Flow is negative. The Operating Cash Flow and the Free Cash Flows are equal to the “Other working capital” line. Working Capital (NWC) measures a company’s liquidity, operational efficiency and overall financial health.
NWC is “is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable“.
MAIN’s annual dividend payout is $2.46 and its current yield is 9.88%. However, because the company’s Net Income and Free Cash Flow are negative, the current payout ratio is a worrying 113.57%.
Until now, MAIN has maintained its dividend in these difficult times. It has withheld its June 2020 semiannual dividend distribution to retain capital for a stronger balance sheet so it can take of investment opportunities but the monthly dividend payment is not affected.
The dividend has been raised for 4 consecutive years and is growing at a reasonable rate.
Shrewd financial manoeuvers and enviable access to liquidity mean that MAIN is in a strong financial position. Obviously, the coronavirus will test the resolve of its portfolio businesses but so far MAIN has weathered the storm quite well.
VERDICT: BUY only if you are comfortable with MAIN’s business model of loaning to and investing in lower middle market companies. Pay particular attention to MAIN’s 2020 performance which will reveal how these companies fare the current coronavirus crisis and incoming recession.
6 – Shaw Communications (SJR)
Shaw Communications Inc is a Canadian telecommunications company which provides telephone, Internet, television, and mobile services all backed by a fibre optic network.
At first glance, Shaw’s Revenues and profitability are good:
- From 2016-2019, Revenues increased 9.3%
- From 2016-2019, EBIT increased 22.3%
- From 2016-2019, Normalized EBITDA increased 10.15%
However, the cash flow statements are not as rosy:
- 2016-2019 Operating Cash Flow decreased 5.7%
- 2016-2019 Net Income decreased 40%
- 2016-2019 Free Cash Flow decreased 41.9%.
Why is cash flow decreasing while Revenues and EBIT are increasing?
Evidently, Capex is the main culprit: Shaw spent $1.298 billion in 2019, $1.332 billion in 2018, $1.613 billion in 2017 and $1.198 billion in 2016.
Telecom companies require large Capex expenditures to finance their infrastructure. Shaw is growing its wireless network and is investing heavily to do so.
Shaw’s Capex is focused on upgrading its wireline and wireless networks. The investment in the wireless network is a big deal for Shaw as it continues to deploy the 700 MHz spectrum and expand the wireless network into 19 new markets. The Capex expenses are definitely justified and will hopefully contribute to the company’s future growth.
However, as a result of the poor current cash position, the coronavirus crisis forced Shaw to temporarily lay off 10% of its workforce and issue a C$500 million senior debt offering. These measures were implemented to raise liquidity in order to finance working capital and general purposes, which includes paying back outstanding indebtedness.
Having to raise hundreds of millions after just a few months of economic difficulties is not a reassuring sign and indicates that the company has insufficient cash on hand.
Indeed, Shaw’s overall debt ratios are not great: Its Current Ratio is 0.78 (poor) and its Debt to Equity Ratio is 1.49 (very poor). Shaw has $6.5 billion in non-current liabilities, which is 3x its EBITDA and 8.8x its Net Income.
Shaw’s debt maturity schedule reveals $2 billion are due within 1 year and $2.6 billion are due in more than 5 years.
In its 2019 annual report, Shaw states that “Based on the aforementioned financing activities, available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations, including maturing debt, during the upcoming fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt”.
Basically, Shaw is saying that while it will try to generate the necessary cash flow to pay off future obligations, its organic cash flow will not be enough. To pay off its obligations, Shaw will have to take on more debt. This is not reassuring: How much more debt will Shaw have to take on to honor its liabilities? When will the significant Capex investments generate cash flow?
For now, it’s clear that Shaw has insufficient cash on hand to pay both the dividend and its liabilities without having to take on more debt. The Q1 earnings report clearly states that Shaw plans to keep a 2.5 to 3x debt to EBITDA ratio to finance its operations, which is quite high. Shaw’s board justifies maintaining high leverage to “finance specific strategic opportunities such as a significant acquisition or repurchase of Class B NonVoting Shares in the event that pricing levels were to drop precipitously“. The merits or flaws of this strategy will be revealed in the next few years.
On to the dividend.
Shaw’s annual dividend payout is $0.88 per share. At current prices, the the yield is an attractive 5.50%. However, once you scratch under the surface, the situation is not so appealing.
Shaw paid $398 million of dividends in 2019, which represents a very high payout ratio of 99.73%. Indeed, this means that virtually all of Shaw’s earnings go towards dividend payments. As a result, this severely limits the company’s ability to invest without having to resort to debt.
Even worse, the 5-year dividend growth rate is -1.93%. From an income perspective, this is far from ideal because it suggests that the dividend is too high and could be scaled back further if the company needs liquidity to invest in growth.
The dividend is much higher today than it was ten years ago but the dividend was cut twice in the past 6 years, once in 2015 and a second time in 2019.
VERDICT: RISKY. While Shaw’s entry in the mobile phone sector is a significant growth opportunity that may boost income and cash flows, its high Capex and upcoming debt maturities will continue depressing cash flows. The 10-year dividend history is good but the recent cuts suggest the company is struggling to generate sufficient cash cover its dividend payments. If the company fails to produce returns on its Capex, then dividend cuts are a possibility.
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Disclaimer: This is not financial advice. Please conduct your own research before investing in any asset.