HCP: This Dividend Aristocrat Will Continue To Increase Its Distributions

Aug.11.14 | About: HCP, Inc. (HCP)

Summary

For years, the track record has been fantastic.

The guidance increased in Q2, forecasting the FFO now being $2.97 - $3.03.

At this level, an increase is to be expected for next year.

Presentation

HCP Inc. (NYSE:HCP) is a major listed real estate company, which is specialized in the field of healthcare. It covers various fields of action, (Senior Housing, Hospital, Medical Office, Post-acute/Skilled, Life Science), and the properties are located primarily in the USA, but also in the UK. This is one of the leaders in the field, with Ventas (NYSE:VTR) and Health Care REIT (NYSE:HCN).

After 29 years, HCP continues to increase its dividend on a yearly basis, even during the bear market of 2008-2009, and it is also the only REIT from the S&P500 to be a dividend aristocrat. Its track record is very solid.

(data : HCP investor relations)

Click to enlarge

After the appointment of Lauralee Martin as CEO late last year, the shares had dropped, hitting $35.50. Since then, the share price movement has been favourable to the recovery, by going upwards, above $40.

The level of FFO as payout ratio, which was almost 100% at the beginning of the 2000s, has decreased to around 70%, starting with the 2010s.

Q2 Results

The results of Q2 were published on the 5th of August. Given the fact that the FFO of Q2 was in -ine with the forecasts, at $0,75, the revenues, at $536,12M, broke the estimate of $12,62M.

As expected, the quarterly dividend was unchanged, at $0,545 per share.

However, the most important part of these results is the revision of the guidance for the FFO per share, which is now within the range of $3.01 to $3.07.

The forecast increase suggests that the dividend will increase again next year, for the thirtieth consecutive year.

What can we expect?

At first, we need to look at the track record since 2004. The estimate for 2014 is based on the quarterly dividend, currently at the level of $0.545 currently paid by share.

(source: HCP investor relations)

Year

Total Dividend

Increase/(Year-1)

2004

$1,67

-

2005

$1,68

0,60%

2006

$1,70

1,20%

2007

$1,78

4,70%

2008

$1,82

2,20%

2009

$1,84

1%

2010

$1,86

1%

2011

$1,92

3,20%

2012

$2,00

4,15%

2013

$2,10

5%

2014E

$2,18

3,8%

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Over the past four years, the increase has always been moderate, between 3% and 5% (based on the data extracted from the above table).

Thus we can define three scenarios, a pessimistic, moderate and optimistic one, in regard to the next increase of dividend, which should occur at the beginning of 2015. It would be interesting that, for each case, we calculate the FFO payout ratio, which will be given after these estimates.

I shall use the two points of the FFO reference guidance, meaning $2.97 and $3.03.

Year

Total
Dividend

Increase/
(Year-1)

FFO payout ratio
(FFO= $2,97)

FFO payout ratio
(FFO=$3,03)

2014E

$2,18

/

/

/

2015E (pessimistic)

$2,20

1%

74,1%

72,7%

2015E (moderate)

2,2454

3%

75,6%

74,1%

2015E (optimistic)

2,289

5%

77,1%

75,5%

Click to enlarge

We can see that no matter the scenario, the payout ratio will be between 72% and 77%, which is reasonable, yet it leaves room for further dividend increases and secures distribution in the event of things going rough for the company.

By comparison, a few days ago HCN released its results, the quarterly dividend is $0.795, and the guidance for FFO is in the range $4.05 to $4.15. This gives us a forecast of FFO payout ratio between 76% and 78%.

Conclusion

HCP is a stable aristocrat dividend, and after the second quarter results, we dare to hope without fear to an increased distribution in 2015, the thirtieth consecutive.

The increase in distributions is not certainly of double digits every year, but the stability and persistence are two qualities that define this title. The share price may be a bit high at the moment. However, the yield is about 5% and the payout ratio is close to that of its main competitor, making it a long-term quality investment.

Disclosure: The author is long HCP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.