When researching stocks, the questions about profits can get tricky. There are many ways to account for company profits that are not just straight income. A good example of that is the measure used widely in the the real estate industry, FFO.
FFO means ‘funds from operations’ and is a measure of how much money is actually coming into the company (though it somewhat differs from cash flow). Why do real estate companies use this measure? Companies depreciate their assets as they drop in value, which reduces their reported profit. Real estate companies are also required to depreciate the value of their buildings. But very often their buildings are actually appreciating. So companies use the FFO measure to hopefully give us a better idea of what the profits are. FFO tells us profits with that depreciation added back in.
Here is an example. Simon Property Group (I do not own this stock) is the largest US REIT (real estate investment trust). They reported a profit over the last 12 months of $5.85 a share, and paid out $7.00 in dividends. That would tend to say that the dividend is not sustainable. But FFO tells us a different story. Simon’s FFO is more in the $11 range, so that dividend can be paid out of their profits without bankrupting the company.
Whenever you’re researching a stock, make sure you find out if there are any quirks to their accounting. FFO is a prime example.