Don't Race Out To Buy CTO Realty Growth, Inc. (NYSEMKT:CTO) Just Because It's Going Ex-Dividend

CTO Realty Growth, Inc. (NYSEMKT:CTO) stock is about to trade ex-dividend in 3 days. This means that investors who purchase shares on or after the 14th of August will not receive the dividend, which will be paid on the 31st of August.

CTO Realty Growth's next dividend payment will be US$0.40 per share. Last year, in total, the company distributed US$1.00 to shareholders. Last year's total dividend payments show that CTO Realty Growth has a trailing yield of 2.4% on the current share price of $42.4. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for CTO Realty Growth

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. CTO Realty Growth distributed an unsustainably high 120% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 14% of its cash flow last year.

It's good to see that while CTO Realty Growth's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit CTO Realty Growth paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by CTO Realty Growth's 11% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. CTO Realty Growth has delivered 17% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. CTO Realty Growth is already paying out 120% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid CTO Realty Growth? It's not a great combination to see a company with earnings in decline and paying out 120% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: CTO Realty Growth has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of CTO Realty Growth don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 5 warning signs for CTO Realty Growth (2 are a bit unpleasant!) that deserve your attention before investing in the shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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