Is CMCT Stock Yielding 5.6%+ Safe?
December 6, 2016
A High-Dividend Stock That Shouldn’t Be Ignored By Investors
High-dividend stocks have many ways to pay out their dividends to shareholders. A few examples include the funds coming from the cash flow from operations, using a leverage balance sheet, or even raising equity to fund the dividend. The ideal scenario would be using cash flow from operations and having the debt in control. Keep in mind, however, that the methods each company uses are not always beneficial from the shareholders’ perspective.
But high-dividend stocks are not created equal, meaning that the current dividend yield should not be the only number that should be considered in each investor’s decision.
This is a common occurrence in the real estate sector, because having debt on the balance sheet is part of the business model. That said, having too much debt could result in a dividend cut, which is bad news for investors that want a high-dividend stock to invest in to receive a steady income.
If equity is raised, existing shareholders will see dilution. This means that more shares are offered to the public markets, causing the shares already in the hands of existing shareholders to be worth a reduced ownership percentage of the entire company.
A stock that is avoiding these pratfalls is CIM Commercial Trust Corp (NASDAQ:CMCT) stock. A high-dividend stock, CIM uses cash flow from it operations for the dividend and is not overloaded in debt.
CIM invests in various types of properties, with “Class A” office buildings accounting for 80% of the portfolio. The remaining 20% is invested into hotels and multifamily properties. The strategic business model has classified CMCT stock as a high-dividend stock thanks to the reliable, steady cash flow.
A reason why such a large portion of the portfolio is invested into office buildings is because it is a business with a high barrier to entry. A large amount of capital and an experienced management team are needed to enter, and investments are only made in high-demand areas such as New York, Los Angeles, and D.C. state.
401(K) 2012/Flickr
CMCT stock yields 5.66%, with the current trading price of $15.46. The dividend of $0.21875 is paid on a quarterly basis. Even though this is a high-dividend stock, the company does have a history of increasing the payment from time to time.
As mentioned earlier, a company with a leverage balance sheet or a company raising equity could be bad news. For CMCT stock, the debt side of the balance sheet looks to be reasonable. The debt-to-capital ratio, which is used to measure what would be left over after paying off all debts, is 49%. A ratio above 50% shows that the company is using debt to grow the business and would be considered to be over-leveraged. Being one percent off from 50% would normally not be a big deal, but makes huge difference for CMT, given its market cap of approximately $1.3 billion.
As for issuing equity to raise more money to cover the high dividend, CIM is actually buying shares. In September of this year, 3.6 million shares were repurchased, with the possibility of more buybacks within the next year. (Source: “CIM Commercial Trust Announces Repurchase of 3.6 Million Shares,” CIM Commercial Trust Corp, September 14, 2016.)
Also Read:
10 Best Real Estate Stocks to Own in 2017
REIT ETF List: Earn Regular Income from These Real Estate ETFs
Final Thoughts on CMCT Stock
All in all, CIM management has a handle on the overall debt outlook. The high dividend is supported by the cash flow from operations and by using the balance sheet strategically.
The current trading price is $15.46, which is trading off its highs from earlier this summer. This could be an opportunity to own the shares of CMCT before the market realizes this, collecting a high dividend in the meantime.
