No. of Recommendations: 4
If they repeat these capital costs continuously, then their dividend coverage looks continuously bad. It would be solved instantly by adding a balance sheet item for capitalisation of capital improvements owing to rises in future income but they don't place that item anywhere. So we are always paying the hit now, for income gains later.
I guess where I have trouble with this argument is the idea that the earnings will ALWAYS look bad as long as they are investing a lot in improvements.
In your example, the first 3 years will look bad, but year 4+ will look fine. If they take on one of this kind of ‘fixer upper’ projects every year, with bad profits in years 1-3 more than made up for in years years 4-10, then by 10 years into this strategy, profits should be fine, unless the size of these projects is increasing enormously.
So surely they’ve been playing by this playbook for long enough to have a neutral effect on earnings? Or are the gains from this strategy mostly from lumpy capital gains?
