Investors may be shocked to see Shaftesbury's (SHB) dividend is not covered by its earnings per share in full-year results published today (27 Nov). There's a good reason why analysts don't see this as a red flag towards future payouts.


Shaftesbury is a real estate investment trust (REIT) and its core income is property rent. Its reported earnings per share (EPS) at today's results is 95p, up from 37.1p a year earlier, leaving its dividend well covered at 7.6 times. Yet both the company and analysts focus on 'EPRA' figures which give a much lower EPS at 12p, below the 12.5p dividend payout for the year.


EPRA (European Public Real Estate Association) is the body that advises listed real estate companies on best practices, such as reporting standards. EPRA adjusted EPS highlights the revenues that are generated from its operations, stripping out items that are not relevant to portfolio performance, such as derivatives.


Many investors like to see a dividend that is at least twice covered by earnings. You could probably go down to 1.5 times dividend cover for utilities because of their steady income stream. Anyone with dividend cover below 1 times is effectively paying out of retained earnings. Over time that will eat up all the cash in the bank and is therefore the dividend is seen as unsustainable.


A fall in Shaftesbury's EPRA EPS was due to its redevelopments, which put almost 10% of its assets out of action. Work is expected to finish this fiscal year, hence why the company feels comfortable putting through a dividend hike. Liberum Capital says this reflects confidence in the EPS trajectory.


Web - Shaftesbury - 27 November


Cantor Fitzgerald analyst Sue Munden increases her price target from 670p to 700p and switches from 'hold' to 'buy'. Liberum stays at 'hold' but lifts its price target from 622p to 636p.


Investors like the results as the shares rise 2% to 627.5p, helped by news of a 14% gain in the valuation of its portfolio of shops, restaurants and offices in London’s West End to £1.4 billion, while it collected 3.1% more rent that in 2012 at £73.2 million.


It spent £28 million adding eight properties to its portfolio during the year and can tap £90.8 million of undrawn bank debt to fund further growth, which is needed with on 1.3% of its estate empty. Its gearing remains low at 29.5%, with its first maturities due in 2016.

Issue Date: 27 Nov 2013