I revealed recently that I sold off the rest of my stake in Intel Corporation (INTC) late last week after the company declared a seventh straight dividend at the same rate - $0.225 per share, quarterly. I rarely sell, as many of you long-time readers are aware, but a static dividend is a big red flag for me. After extremely careful consideration I felt compelled to move on to other companies with better opportunities for continued dividend growth by way of growing profits, ensuring me increased purchasing power going forward.
The great thing is that not only was I able to make up for the lost income from the Intel sale, but I actually increased my dividend income and gave myself a great chance at better dividend growth going forward.
I purchased 60 shares of Omega Healthcare Investors Inc. (OHI) on 1/24/13 for $32.02 per share. Omega is a real estate investment trust (REIT) that provides financing and capital to the long-term healthcare industry, with a primary focus on skilled nursing facilities. Their properties are located in the U.S., and spread out across 33 states. As of September 30, 2013 they owned or held mortgages on 477 skilled nursing facilities, assisted living facilities and other specialty hospitals.
I was recently analyzing Omega and really liked what I saw. The growth over the last five years has been strong, and this REIT appears to be very committed to growing the dividend. Furthermore, the entry yield is very enticing at today's price. From 2008-2012 revenue has grown at a compounded annual rate of 16%. Now, the company also issued a lot of shares during this time which helped propel this substantial growth. Looking at revenue growth per share, OHI was still able to delivery relatively strong growth with a CAGR of 7%. When looking at a REIT's profitability you don't want to use earnings because REITs have large depreciation costs. Instead, it makes more sense to use FFO (funds from operations), which adds back in depreciation and amortization expenses. And FFO growth over the last five years has been rather robust, with a CAGR of just over 12%.
But what about the dividends? Show me the money, right? As a dividend growth investor it is imperative for me to invest in a company that takes its business relationship with the part-owners (us shareholders) seriously, and so how can management show that it takes this relationship more seriously then handing out more cash every single year as the profits in the underlying company continues to grow?
Well, Omega has been able to grow its dividend for the last 11 years straight. Its 10-year dividend growth rate is over 28%, and the 5-year DGR is just over 9%. These are very solid numbers here, especially considering that OHI currently has a yield of 6.1%. Furthermore, Omega has built up a fairly consistent record of increasing the dividend every quarter or every two quarters over the last few years. Most recently, the company announced a dividend increase to $0.49 quarterly per share, an increase of $0.01, or 2.1%, over the old quarterly dividend of $0.48 per share. And this was after the company increased dividends in the last five quarters! A yield of over 6% backed by solid mid-single-digit growth is something I can get very excited about. Furthermore, the dividend is well covered here by Omega. The company currently has a payout ratio of 80% using TTM FFO, which is healthy for a REIT. This means that there is a reasonable chance for further solid dividend growth from Omega going forward.
Another thing I like about OHI is that it's a rather small company, with a total market cap of just under $4 billion. Most of my holdings are with fairly large blue-chip companies, and this provides me some exposure to a faster growing, mid-cap company. The balance sheet looks fair, with just over $3 billion in assets against just over $1.8 billion in liabilities. The debt/equity ratio is currently at 1.4, and the interest coverage ratio is over 2. I don't see anything to be concerned about here, as it is leveraged appropriately when comparing to other REITs in this space.
Overall, I really like Omega. The company has a track record of solid growth, and has shown a willingness to share that growth with shareholders in the form of rising dividends. Moreover, the aging population we have here in the U.S. bodes well for this healthcare REIT. According to the Administration on Aging, the population of persons aged 65 or older will be about 72.1 million - more than twice the number in 2000. While being over 65 years old does not necessarily mean one needs the assistance of a skilled nursing facility, the general trend towards an increasing elderly population simply means there is a greater pool of potential clients which OHI can draw from. In addition, I like the fact that OHI focuses on the financial side of owning these properties or providing financing, while allowing third parties to provide the day to day care and operations. This means OHI can focus on what they specialize in.
Omega has been very active in issuing new shares and using this capital to fund new properties. In 2012, they closed over $500 million in new investments consisting of: 39 skilled nursing facilities, 6 assisted living facilities and 6 independent living facilities. The company continues to aggressively add to its portfolio in a manner that is most profitable for shareholders.
There are risks with this REIT. Clients that use the services of Omega are obviously dependent on income from Medicare. Any cuts in Medicare could impact Omega's clients, and therefore Omega. Medicare is typically hard to target as far as budget cuts, and I feel that any risks there are outweighed by the growth in the population segment that OHI targets. Another potential risk is that Omega is not particularly diversified in other industries, but that's why I like to own REITs in other industries like retail, office space and technology.
I valued shares using my typical Dividend Discount Model analysis. I used a 10% discount rate (my required rate of return) and a 6% long-term growth rate - well below what OHI has managed to deliver thus far. This gave me a fair value on shares of $51.94. I think it's reasonable to assume that a 10%+ margin of safety exists in shares at today's price. OHI currently trades at a P/FFO ratio of 13, using TTM FFO, which is fairly attractive, in my view.
This purchase adds $117.60 to my annual dividend income total based on the current quarterly payout of $0.49 per share. I purchased shares just before the ex-dividend date, so I will receive the February dividend. In addition, this dividend income more than makes up for the income I lost by way of the Intel sale. This purchase did not use up all of the proceeds from the sale of INTC shares, and I'll be discussing what I did with the rest in the coming days. My portfolio currently holds 43 positions. Although I closed out my position with INTC, reducing the portfolio to 42 investments, OHI was a new position for me and brought the portfolio back up to 43 holdings.
I usually like to include valuation comparisons from analysts with Morningstar and S&P Capital IQ, but neither firm tracks OHI. I'll update my Freedom Fund in early February to reflect my recent addition.
Disclosure: Long OHI