Starwood Property Trust (NYSE: STWD) is a mortgage real estate investment trust, or REIT, that has been publicly traded for 15 years. Its $26 billion portfolio consists of loans to both commercial and residential borrowers.The company has paid a $0.48 per share quarterly dividend since 2014, which comes out to a 10% yield on the stock’s current price. Can shareholders expect to continue receiving $0.48 per share each quarter?Starwood Property Trust uses a metric it calls “distributable earnings” to measure its cash flow.In 2023, distributable earnings fell nearly 9% from $726 million to $663 million. When Starwood releases its full-year results in February, distributable earnings are expected to be $677 million.
Because 2023’s $663 million was below the prior year’s figure, the stock’s dividend safety rating gets a one-point penalty. If 2024’s total comes in at less than $663 million, that downgrade will remain in effect.In 2023, Starwood paid $601 million in dividends for a 91% payout ratio. The total dividend payout is forecast to inch up to $610 million in 2024, but with distributable earnings also projected to rise, the payout ratio would actually drop to 90%.With mortgage REITs, I’m comfortable with payout ratios of 100% or lower, as REITs must pay out 90% of their earnings. (Distributable earnings aren’t the same as regular earnings, as distributable earnings factor out noncash items.) Since REITs have that higher requirement and typically aim to provide the most income possible to investors, a 100% payout ratio is reasonable.If it goes above 100%, it’s a problem. But up to 100% is fine as long as distributable earnings – or whatever cash flow metric the company uses – aren’t expected to fall.So we have a company that has paid a stable dividend for 10 years and has a payout ratio within my comfort zone. The only yellow flag is the decline in distributable earnings in 2023. If the growth number is positive in 2024, all is forgiven, and the company’s dividend safety rating will be perfect.Until then, we can’t ignore the one-year decline in distributable earnings, because it increases the risk of a dividend cut just a little. But at the moment, I’m not worried.
Dividend Safety Rating: BMore By This Author:Invest Like A Man
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