Starwood Property Trust (NYSE: STWD) has made a name for itself over the last 15 years as a player in the mortgage real estate investment trust (REIT) arena. With a substantial $26 billion portfolio, it focuses on lending to both the commercial and residential sectors.
Since 2014, the company has impressively sustained a steady quarterly dividend of $0.48 per share, translating into a tempting 10% yield based on the current stock price. So, the burning question is whether shareholders can anticipate this trend to persist?
Central to Starwood’s strategy is its use of “distributable earnings” to represent its cash flow. This figure dipped from $726 million to $663 million in 2023, marking nearly a 9% decrease. Looking ahead, the forecast for the full year in February suggests a bump back up to $677 million.
Reflecting this downturn in 2023 to $663 million versus the prior year, the stock’s dividend safety rating took a hit. Should 2024 figures not surpass this, expect the rating to remain affected.
In terms of dividends, Starwood distributed $601 million in 2023 at a payout ratio of 91%. For 2024, predictions indicate a slight increase in payouts to $610 million. However, with expected higher distributable earnings, this would lower the payout ratio to a more manageable 90%.
A payout ratio under 100% is within my comfort zone for mortgage REITs, which are mandated to distribute 90% of their earnings. Given the emphasis on high investor returns, a 100% payout isn’t outlandish. It only becomes concerning if the ratio exceeds 100% without stable cash flow to support it.
With a decade of consistent dividends and a fairly secure payout ratio, things look optimistic. The only concern is the 2023 drop in distributable earnings. Should we see an upward trend in 2024, all will be forgiven, and the dividend safety rating will shine.
For now, acknowledging the earnings dip is crucial as it slightly heightens the likelihood of a dividend cut. Yet, at present, there’s no cause for alarm.
Currently, the Dividend Safety Rating stands at a B.
### Safety Net Strikes Again
Reflecting on 2023, none of the nine stocks with an “A” rating in this assessment reduced their dividends. Similarly, the stocks rated as “B” and “C” held steady too. In contrast, stocks with “D” and “F” ratings weren’t as fortunate: two out of nine “D” stocks slashed their dividends, while six of nine “F”ers did the same.
This trend extended into 2024. Of the 10 “A”-rated stocks, none cut their dividends, and three even bumped them up. Within the “B” category, all 14 maintained their payouts, with six enjoying boosts.
Among the 11 stocks rated “C,” two hiked their dividends, though two reduced them, including 3M (NYSE: MMM), a former Dividend Aristocrat with a 66-year track record.
In the “D” category, we saw two raises and two cuts among five stocks.
Finally, for the “F” rated stocks, out of nine, none saw an increase, and three experienced cuts.
Our analysis illustrates that stocks with “A” and “B” safety ratings are less prone to decrease dividends, while those with “D” and especially “F” ratings face a higher risk of cuts.
If you have stocks you’d like us to evaluate, feel free to share their ticker symbols in the comments. Remember, we focus on individual stocks, not ETFs or funds, as cash flow – essential to the Safety Net formula – can’t be assessed in the same way for those.
