Hospitality Properties Trust: Keep Those Stops Tight

About: Hospitality Properties Trust (HPT)
by: Individual Trader

The REIT pays out an 8% dividend.

Growth though is mute.

Low interest coverage ratio also brings concerns to the table.

Hospitality Properties Trust (HPT) pays out a dividend yield north of 8%. The company has been able to increase its annual payout for 7 years now. Considering how strong US equities remain and how Hospitality Properties Trust has performed over the past decade, we can see dividend investors becoming interested here.

A high-yielding REIT such as Hospitality Properties Trust is not an investment. HPT is a volatile stock. Dividend per share numbers for example now exceed the firm's earnings per share numbers. Furthermore gross margins over the past decade have dropped from 55% to 39% so the presence of a clear competitive advantage is doubtful, to say the least. Dividend investors should be looking to protect the downside here at all costs.

As we can see from the chart below, investors will be looking for a reverse head and shoulders pattern to play out here. The 200-day moving average here may act as support for the right shoulder of the pattern if stocks continue to rally. What is encouraging is the increase in buying volume last month plus the higher right shoulder. Both of these signs are usually a sign of strength for the stock.

If the inverse head and shoulders pattern was to fail, investors should watch the October's low which is a key support level. Assuming we stay above that level, let's look at the dividend to see how stable it is.

The REIT as mentioned pays out an 8%+ yield. The growth of the dividend though over the past 12 months is 2% as the firm in recent years has usually only increased the payout by $0.01 per quarter. The 5 years dividend growth rate for example comes in at 2.2%. Although the CPI inflation rate has dropped to around 1.5%, we would be looking for more dividend growth from Hospitality Properties Trust to ensure purchasing power remains protected going forward.

The dividend payout ratio lets us know whether the company is making enough money to support the dividend. We like to calculate this ratio off both earnings and cash. At the end of the day, cash pays the dividend and not earnings. The dividend payout ratio from earnings is 59% and from free cash flow is 58%. The latter number is the lowest it has been since 2009. Right in the sweet spot and attractive.

What we have looked at so far though is backward-looking to an extent. Free cash flow and the payout ratio are both trending in the right direction but we still need more indicators on whether that dividend can continue to be increased. We look to how the interest coverage and debt to equity ratios have been trending as well as future earnings expectations to give us some insight on how dividend growth will trend going forward.

Hospitality Properties Trust has a debt to equity ratio of 1.60 and an interest coverage ratio of 2.01. Both of these key metrics have been trending in the wrong direction. When a company has an interest coverage ratio of 2 or lower, it puts extra pressure on the firm to keep on growing its pre-tax earnings. As a result, management does not have the luxury of a few poor earnings misses in the quarters ahead.

Although net earnings are expected to hit $1.88 per share this fiscal year (which would be a $0.75 increase on 2018), earnings expectations for 2019 have been trending downwards.

Therefore one would feel that this stock (to keep on paying out that dividend) would need for things to go right for it in order for the dividend to continue to grow. We have already touched on the interest coverage ratio. On the balance sheet, it is also evident that liabilities are growing faster than assets.

The share price should rise along as earnings accompany it. On these type of plays, it is always about keeping tight stops. As many investors have found out the hard way, the dividend becomes immaterial to a large extent if one is left holding the bag with a position that is deeply underwater.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.