Dividend growth companies successfully executing their business plans see rising earnings (or FFO in the case of a REIT) and are able to pass part of that success onto investors in the form of a dividend raise. On the other hand, dividend freezes and dividend cuts typically indicate something is wrong with a business, especially if said company had a respectable streak in place. A few weeks ago Senior Housing Properties (SNH) announced a dividend freeze and effectively ended a dividend growth streak of 9 years. SNH is currently repositioning itself by selling a number of properties. Some properties have already been sold, others are still on the market. Regardless, the board of directors chose to halt the SNH dividend growth streak during this transition phase as the dividend coverage is thin. Kind of a shame the streak fell just short of a decade.
SNH's reasons for holding the dividend steady are actually pretty decent in my opinion. It does not appear to be a business in trouble, and a convincing argument could be made to continue holding. However at the end of the day, I need to realize a rising income stream. That's my goal and the reason I even bother to invest. I could tolerate a freeze from a company like a General Mills or a Bank of Nova Scotia. Each has been paying uninterrupted dividends well over a 100 years. With something like SNH I am less forgiving, plus it's not hard to find a replacement. I'm moving on!
With this sale I lost $87.36 worth of annual income.
I'm going with Omega Healthcare Investors (OHI) as the replacement. This is a company executing its business plan aggressively and with a lot of success. OHI has been able to grow FFO at a rapid pace and in turn the dividend growth has also been excellent. Dividend growth has averaged low double digits in recent years and is also sitting on a 11 year streak.
There are quite a few similarities between SNH and OHI. Both are healthcare REITs, with similar yields, and similar market caps. They even pay dividends during the same month. But I also notice a few differences between the two. First of all OHI is far more aggressive. They are expanding rapidly and leveraging cash flow with a higher debt load. I think that is exactly what a REIT should be doing while interest rates are so low. Omega is almost exclusively focused on the skilled nursing segment within the healthcare property realm, another fact I find intriguing. I anticipate increasing demand for these types of properties as the baby boomer generation ages. Baby boomers are eventually going to need long term care facilities and there are millions and millions of boomers. When I think of healthcare REITs, long term care facilities are what I have in mind. I'm not as interested in hospitals or medical office buildings that can also be included within the healthcare REIT industry.
I used to proceeds from the SNH sale as well as some cash collecting dust in my ROTH to fund this purchase. These shares are set to pay me $111.36 on an annual basis. I think OHI offers a decent value at the moment, but the share price has increased tremendously over the past couple years. It's a shame I passed on OHI over the years, it has delivered an outstanding operational performance.
Symbol: OHI
Core Position: No
Speculative Position: No*
Expectations: Steady income; 3% annual dividend growth
Automatic Sell: Frozen dividend; dividend cut
Consider Selling: Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations.
* I currently do not consider OHI to be speculative, but perhaps borderline.*
ARCP was the other replacement candidate under consideration. As of today ARCP is trading around $12.50... I find the value (and yield) compelling. However I worry that particular REIT is expanding too quickly and is gobbling up more than it can chew. I was reading about 3 massive acquisitions and frankly I'm just not sure I can digest it all. I may consider ARCP again down the road; too many moving parts for now.
I think you made a sound choice with OHI. Having pulled the trigger on both OHI and ARCP earlier this year, I am interested to see how things sort out over the next 5, 10, 15 years and more. I think anything in the medical field will have plenty of growth opportunities, and believe that even with the crazy growth, ARCP is making accretive acquisitions, so the payoff should be realized. They have already announced their intentions to increase their dividend payments as the acquisitions finalize. All that being said, the risk absolutely lies with the rate of growth, and their ability to both manage the additional properties and ensure that they are increasing EPS.
ReplyDeleteI have pretty high hopes for OHI. If they can even make half the FFO growth on a % basis from the past couple years I will be a happy shareholder. Omega has been an absolute monster and I just need management to continue executing. I do like ARCP, but I'm not ready to start an investment at this time. Perhaps after all the dust settles and I can make more sense of all the acquisitions. One day I hope to join you as a ARCP shareholder.
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