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Is this extremely high dividend stock even safe anymore? Management made a huge mistake

Jessie Ramsdale
22. 4. 2023
5 min read

A high dividend attracts every investor. Let's face it. But an extremely high dividend should make you wary. Even more so when it's as high as this company's. What causes it, what does it mean, and is it still profitable for investors?

OPI office properties trust $OPI-2.2% is a real estate investment trust traded on the ASX in Australia. The trust invests in commercial property, primarily office space and retail centres in Australia. As at 31 December 2019, the trust had 29 properties in its portfolio valued at AUD3.9 billion. The Trust's portfolio is diversified in terms of asset type, location and tenants.

OPI
$2.23 -$0.05 -2.19%

Capital Structure

Market Cap
108.71M
Enterpr. Val.
2.66B
Revenue
540.57M
Shares Out.
48.75M
Debt/Capital
0.67
FCF Yield
-78.85%

Valuation / Dividends

P/E
-1.96
EPS
-1.14
P/S
0.20
P/B
0.09
Div. Yield
23.27%
Div. Payout
-49.83%

Capital Eff. / Margins

ROIC
8.89%
ROE
-5.76%
ROA
-1.87%
Gross
76.83%
Operating
62.50%
Net Profit
-13.72%
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9

Now the main question - is it safe? The clear answer is no. There are many risks and especially "hidden" factors that inexperienced investors should be aware of with companies like this. Let's take a look at the general risks of high dividends.

Lack of investment funds for growth. Very high dividends can significantly deplete a company's financial resources and make it difficult to invest in growth through acquisitions, capacity expansion, etc. This can threaten the long-term sustainability of high dividends.

Debt. A company may be forced to increase its debt to sustain high dividends. This increases financial risks such as the ability to pay interest and bond payments.

Impact on share value. Even if dividends are pleasant for shareholders, they can push the stock price down in the short term to bring the dividend back to a more sustainable level. High dividends are not sustainable if they do not match the profitability and cash flow of the company.

Exposure to external shocks. A company with a very high dividend is more vulnerable to external events that could reduce its earnings and cash flow. It would then be at risk of having its dividend reduced or even missed.

Impaired liquidity. High dividends can lead to lower stock liquidity because the company holds less cash. This makes it difficult for shareholders to sell shares without a significant drop in price.

High dividends can bring short-term benefits, but also serious risks that can threaten the sustainability of dividends and the value of shareholders' investment. The sustainability of a company's dividends should be considered in light of its earnings, cash flow, growth opportunities and risk profile. We now look at the main risks directly to OPI.

OPI's main risks are:

Economic slowdown and negative impact on demand for office and retail space. This risk is extreme , as the current situation plays against REITs in all respects.

Competition from new projects that could lead to lower rents.

Dependence on the real estate market, which is cyclical.

Interest rate risk - an increase in interest rates could reduce the attractiveness of investing in REITs. We are now seeing high interest rates understandably. They are even the highest interest rates in several years.

But looking at a chart of $OPI-2.2% and its values is all wrong. Dividend 35%, negative P/E and payout 0. So what's going on?

What's going on?

Office REITs have been having a tough time since the pandemic began in March 2020. In 2022, this weakness was most evident as 12-month effective rents for office REITs in the top five U.S. locations rose a paltry 4.9%; far less than the rate of inflation in 2022. That wouldn't matter so much. Thanks to its occupancy, $OPI-2.2% has long outperformed its competitors and fared better overall. But now comes news of a big merger between two trusts, and the company's stock has plunged 40%.
There is a misconception in the investment community that corporate management teams behave relatively rationally, at least for the most part. However, every now and then a transaction comes along that just doesn't make sense. Such is the case with the just-announced merger of Diversified Healthcare Trust $DHC+0.2% and Office Properties Income Trust.

For investors in Diversified Healthcare Trust, the deal that will see the business essentially absorbed by Office Properties Income Trust is something of a lifesaver. For the acquirer's shareholders, however, the move should be viewed very negatively. Purely because the business has substantially overpaid for the assets it is taking over.

Although Office Properties Income Trust is much smaller, its financial situation is much better. Between 2021 and 2022, the company saw a more modest decline in revenue from $576.5 million to $554.3 million. And the company generated significant, though admittedly declining, profits from these properties. One of the motives behind Office Properties Income Trust's move in this direction was likely an effort to diversify out of the office property category. However, they couldn't have picked a worse company or a worse space to diversify. Quite simply - this is what management got wrong. And then it was all downhill from there. Loss of money, negative P/E, share price plunge and hence unsustainably high dividend.

This is exactly why it's important to examine what's going on and the company in question and not just look at the numbers. The high dividend may look great, but there is a huge problem behind it. Think about it.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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