Don’t judge a post by its title; I assure you this article is far from irrelevant. Let’s delve into the world of dividends, investments, and a rather bizarre metaphor about “cutting the cheese.”
Now, before you start associating our topic with flatulence, let’s clarify. In the context of this discussion, “cutting the cheese” refers to the potential for certain companies to reduce their dividend payouts. Yes, you read that right, we’re talking “cheddar.”
Let’s transport ourselves back to a bygone era – 1961, to be precise. A delightful book titled “The Definitive Fart Book” offers a lighthearted take on the subject, with phrases like “let one rip” or “copped a pop.” Perhaps not the most intellectual references, but they do reflect a time when such matters were perhaps less taboo.
For those not fully versed in the slang wisdom of the ’60s, don’t let that alarm you. Our modern discussion today is indeed about monetary dividends, not bodily emissions.
But why “cheese”? Well, it appears the slang is derived from a time when welfare benefits included actual cheese distributions. Odd, isn’t it? But over time, the term has evolved to symbolize money, particularly in relation to dividends paid by companies.
Given this, it’s only fitting to explore the REITs that could potentially “cut the cheese” – a list of real estate investment trusts that may slash their dividends.
Insights on Probable Dividend Cuts
The spark for this article originated from an enlightening piece by Al Root in Barron’s. In his work, he elaborated on the inevitability of dividend cuts, pointing out that a small percentage of companies tend to reduce dividends each year, outside of major financial crises.
Wolf Research strategist Chris Senyek also highlighted eight companies likely to “cut the cheese,” namely Vail Resorts, Hasbro, Whirlpool, Wendy’s, Cracker Barrel Old Country Store, Legget & Platt, LCI Industries, and Kohl’s.
Senyek estimated that these eight companies would allocate approximately 100% of their estimated 2024 free cash flow as dividends, in stark contrast to the S&P 500’s average payout ratio of 55%.
After perusing Root’s article, my thoughts naturally gravitated toward REITs in similar precarious situations. Here are eight that have caught my attention.
Let’s dive into inspections of eight REITs, starting with…
Assessment of Healthcare Realty Trust (HR)
HR, an internally managed real estate investment trust, specializes in developing, acquiring, and managing healthcare properties, primarily medical outpatient buildings located around leading hospital campuses in the U.S. Their portfolio, valued at approximately $6.2 billion, spans 35 states and comprises 700 properties focusing on 15 high-growth markets.
The vast majority of HR’s medical properties are associated with the provision of outpatient medical services, primarily multi-tenant medical properties on or near top healthcare systems. As of September 30, 2023, 72% of their medical properties were located on or adjacent to a hospital campus, further emphasizing their strategic positioning.
In terms of dividend history, HR displayed a cut in the fourth quarter of 2022, reducing its quarterly dividend from $0.325 to $0.31 per share. The annualized dividend for 2022, excluding special dividends, stood at $1.28 per share, whereas the annual dividend in 2023 amounted to $1.24, marking a 3% decrease.
What’s even more concerning is the analysts’ projections, indicating that HR’s dividend is anticipated to exceed their free cash flow or adjusted funds from operations (“AFFO”) for 2023, 2024, and 2025. In those years, the projected AFFO payout ratios stand at 106.90%, 104.20%, and 105.08%, respectively, marking a worrying trend.
While the stock offers a high dividend yield of 7.47%, the projected payout surpassing the free cash flow/AFFO generates apprehension regarding the sustainability of the dividend.
