COR: What Does Falling Cash Flow Mean For This Perpetual Dividend Raiser?

What Does Falling Cash Flow Mean for This Perpetual Dividend Raiser?

Last week, I covered data center real estate investment trust (REITDigital Realty Trust (NYSE: DLR). The stock received an “A” rating despite a drop in funds from operations (FFO) in 2020. To find out why Digital Realty received an “A” rating from SafetyNet Pro, click here.

That led to a reader asking me to analyze Digital Realty’s competitor, CoreSite Realty (NYSE: COR).

The company operates 24 data centers in eight North American markets, so it’s much smaller than Digital Realty, which has 280 data centers in 20 countries.

CoreSite’s business has been growing, though not at a particularly rapid pace.

Funds from operations (FFO), the measure of cash flow used by REITs, jumped in 2018, and then growth slowed over the next few years. However, this year, FFO is forecast to decline more than 8%.

That’s an issue.

Uh-oh... FFO Is Going the Wrong Way

In 2020, CoreSite paid $236 million in dividends for a payout ratio of 92%. So it can cover the dividend. (Note: Because REITs must pay out at least 90% of their earnings in dividends, I’m comfortable with payout ratios up to 100%.)

This year, CoreSite’s payout ratio is forecast to decline slightly to 91%, giving us just a little more room for error in case FFO is lower than expected.

CoreSite has raised its dividend for 10 years in a row. It currently pays $1.23 per share quarterly, which comes out to an annual yield of 4.1%.

As with Digital Realty, whose one blemish on its dividend safety checklist was forgiven, because of CoreSite’s strong dividend-paying history of 10 years with no dividend cuts, SafetyNet Pro will overlook the projected lower cash flow in 2021.

If cash flow is in fact lower this year, and if it is forecast to decline again next year, we’ll see a downgrade of CoreSite later in 2021. For now, however, the dividend is very safe.

Dividend Safety Rating: A

Dividend Grade Guide

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