Highwoods Properties' Steady Dividend Amid High Payout Ratio: A Closer Look

Highwoods Properties (NYSE: HIW), a prominent office REIT, has maintained its quarterly dividend at $0.50 per share for the past two years, most recently declared on July 17, 2024, with a payment date of September 10. This consistency has positioned HIW as a reliable income generator for investors seeking steady payouts. However, beneath the surface lies a critical question: Can the company sustain its dividend policy given its elevated payout ratio and evolving real estate market dynamics?

A History of Stability, But with Nuances
Highwoods’ dividend track record is marked by gradual growth followed by recent stagnation. After climbing from $0.425 per share in 2016 to $0.50 by 2022, the dividend has remained flat, with only a minor hiccup in April 2024 when a declared $0.5025 payment was adjusted to $0.50. This consistency aligns with the company’s focus on preserving liquidity amid a challenging office market. Notably, HIW also distributed a special $0.80 dividend in early 2017, reflecting its ability to return capital during stronger periods.

The Elephant in the Room: A Payout Ratio Over 100%
Highwoods’ dividend sustainability hinges on its ability to cover payouts with earnings. According to the data, HIW’s payout ratio currently stands at 141.26%, meaning dividends exceed reported earnings by over 40%. This metric raises red flags, as companies with sustained payout ratios above 100% often rely on balance sheet flexibility, asset sales, or debt issuance to fund distributions. For context, the average payout ratio for REITs in the office sector typically hovers between 60% and 80%.

Investors should scrutinize how HIW has managed this imbalance. The company’s recent dividend consistency suggests it has prioritized stability over earnings growth, potentially at the cost of long-term financial health. This strategy could strain capital reserves if occupancy rates decline further or rental growth slows.

What’s Ahead for HIW Investors?
The next dividend payment, scheduled for December 10, 2024, will be another test of HIW’s financial discipline. With an ex-dividend date of November 18, income-focused investors may still find the stock appealing for its quarterly $0.50 payout, which annualizes to $2.00 per share. However, the high payout ratio underscores the need for cautious optimism.

Looking ahead, HIW’s ability to navigate the office REIT sector’s headwinds will be critical. While remote work trends and tenant demand shifts pose challenges, the company’s focus on high-quality assets in markets like Raleigh and Tampa could provide a buffer. That said, maintaining the dividend without improving earnings—or increasing leverage—will likely limit upside potential for total returns.

Conclusion: A Reliable Dividend, But at What Cost?
Highwoods Properties’ unwavering $0.50 dividend per share offers investors a predictable income stream, particularly in a low-yield environment. Yet, the 141% payout ratio serves as a warning sign, indicating that earnings are insufficient to fund current distributions. Historically, REITs with such elevated payout ratios face heightened risks of dividend cuts or slower growth.

Investors must weigh HIW’s income reliability against its financial flexibility. For those prioritizing steady payouts with little growth expectations, HIW may still hold merit. However, shareholders seeking capital appreciation or a margin of safety should scrutinize whether the dividend can persist without eroding the balance sheet further. As the office market evolves, Highwoods’ ability to reconcile its dividend policy with profitability will determine its long-term viability as an income staple.

Data as of September 2024.