This article is about Omega Healthcare Investor Inc. (NYSE:OHI) and why it's an income investment with good growth that's 2.71% of The Good Business Portfolio. Omega Healthcare Investor Inc. is the leading company in skilled nursing facilities (SNF's). The following topics will be discussed: Omega Healthcare Investor Inc. Is Not Like Other Healthcare REITS, The Good Business Portfolio Guidelines, Total Return, Earnings, Company Business, and Takeaways and Recent Portfolio Changes.
Omega Healthcare Investor Inc. Is Not Like Other Healthcare REITS
Recently HCP, Inc. (NYSE:HCP) and other health care REITS released poor earnings and Omega Healthcare Investor Inc. was grouped with them unfairly. Omega Healthcare Investor Inc. is the largest skilled nursing care company with great management to balance, dividends, new investment and modernization of its unique facilities. HCP is almost three times the size of OHI but its skilled nursing care facilities are a small part of the company. HCP has all kinds of health care properties while Omega Healthcare Investor Inc. is concentrated in the skilled nursing care sector which is growing. For Omega Healthcare Investor Inc. Superior growth of FFO and FAD are more than enough to raise the dividend by 0.01 each quarter for years. People are living longer and the growth of those needing skilled nursing care is growing with it.
Good Business Portfolio Guidelines
Omega Healthcare Investor Inc. passes 9 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don't break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average.
Omega Healthcare Investors is a mid-cap company with a capitalization of $6.40 billion. Its portfolio of real estate investments include over 923 properties located in 41 states and operated by 83 different operators and there are also properties in England as a result of the recent company purchase. Its portfolio includes healthcare facilities and mortgages on healthcare facilities. This size will allow Omega Healthcare Investor Inc. the ability to buy and add smaller companies to continue its great growth.
Omega Healthcare Investors has a dividend yield of 8.1% and its dividend has been increased each of the last ten years. The payout ratio is high at 80% because of its REIT designation. Omega Healthcare Investors therefore is a growth and income story as the demand for the skilled nursing care segment continues. The dividend is expected to be increased in early April and is estimated to be increased by $0.01/quarter or a 2.0% increase or 8% per year with four of these increases per year.
Omega Healthcare Investors income is good at $0.81/Qtr. FFO which leaves Omega Healthcare Investors plenty of cash flow, allowing it to pay its high dividend and have a enough left over for its growth investments in add on properties.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.0% of the portfolio as income and I need 2.0% more for a yearly distribution of 5%. Omega Healthcare Investors has a three-year CAGR of 18.3% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $21,397 today (from S&P IQ). This makes Omega Healthcare Investors a good investment for the income and growth investor with its steady 8% dividend and FFO earnings growth.
Omega Healthcare Investors S&P Capital IQ has a hold rating for the company. Recently Omega Healthcare Investors stock price got taken down with other health care REITS because of the other Healthcare REIT's poor earnings. this is not true of Omega Healthcare Investor Inc., they have good Increasing earnings in the skilled nursing care market. Omega Healthcare Investors is under priced at present and a good choice for the income and growth investor.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Omega Healthcare Investor Inc. had much higher total return than the Dow baseline in my 37.3 month test period. I chose the 37.3 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the losing year of 2016 YTD. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The high total return makes Omega Healthcare Investors appropriate for the growth investor with the 8% dividend good for the income investor. The dividend is well above average and easily covered by the FFO and has been paid and increased each year of the last 10 years. The dividend has been increased in each of the last 14 quarters and is now 0.57/Qtr. with the expectation of another $0.01 increase in the next two months. In the last earnings call Omega Healthcare Investor Inc. management stated their intention to continue the $0.01 quarterly dividend for a long time and may actually have to increase the dividend due to the REIT tax rules as the FFO increases.
DOW's 37.3 month total return baseline is 21.91%
37.3 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Omega Healthcare Investor Inc.
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Last Quarter's Earnings
For the last quarter Omega Healthcare Investor Inc. reported FFO earnings on February 10, 2016 that beat expected at $0.81 compared to last year at $0.72 and expected at $0.72. Revenue was lower than expected by $0.91 Million. This was a good report showing earnings above expected and Mr. market took Omega Healthcare Investor Inc. up 2%. FFO earnings for the next quarter are released in early April and are expected to be at $0.81 compared to the last year at $0.77. Omega Healthcare Investor Inc. has a small revenue head wind due to the strong dollar but has good growth potential going forward with its increasing property base. Omega Healthcare Investor Inc. guided higher for the 2016 year at FFO of $3.30-$3.35.
Omega Healthcare Investors, Inc. (Omega) is a self-administered real estate investment trust (REIT). The Company invests in income producing healthcare facilities, long-term care facilities located throughout the United States and England. The Company provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and assisted living facilities (ALFs), independent living facilities, rehabilitation and acute care facilities. It finances investments through borrowings under its revolving credit facilities, private placements or public offerings of its debt and equity securities, secured indebtedness, retention of cash flow or a combination of these methods. Its portfolio of real estate investments include 923 properties located in 41 states and operated by 83 different operators. Its portfolio includes healthcare facilities and mortgages on healthcare facilities. It also offers fixed-rate mortgage loans. Omega Healthcare Investor Inc. also has a small revenue head wind because of the strong dollar from its England holding. As people are living longer the percentage of the population needing skilled nursing care will increase, and so will the earnings of Omega Healthcare Investors, Inc. To show the growth in the pipe line Omega Healthcare Investor Inc. has 90 projects already started with $186 Million completed in 2016 with $650 Million planned for the rest of the year.
Takeaways and Recent Portfolio Changes
Omega Healthcare Investors is a income and growth company. Considering Omega Healthcare Investors steady growth and its total return better than the Dow average, Omega Healthcare Investors is a buy for the income and growth investor. The only negative for Omega Healthcare Investors is if the Fed continues raising interest rates that will cause rising interest expense, giving Omega Healthcare Investors a headwind in the near term. Omega Healthcare Investors also is a defensive business helping to dampen the market swings. Omega Healthcare Investor Inc. has a high dividend yield of 8.1% providing the dividend income investor with a great entry point to lock in this high yield with good growth in the long term. If you don't already have a position in the health care sector Omega Healthcare Investor Inc. may be a buy for your portfolio.
Last week The Good Business Portfolio bought Omega Healthcare Investor Inc. increasing its percentage of the portfolio to 2.71%. The portfolio needs a little more income and with the stock price down its a no brainer to add to this growing income and growth company.
Trimmed Hanes Brands (NYSE:HBI) to 0.3% of the portfolio. The last earnings report was weak, May have missed the growth boat on this one.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.52% of portfolio, Johnson & Johnson (NYSE:JNJ) is 8.76% of the portfolio, Boeing (NYSE:BA) is 7.4% of the Portfolio, Altria (NYSE:MO) is 8.0% of the Portfolio and L Brands Inc. (NYSE:LB) is at 7.3% of the portfolio.
Therefore HD, JNJ, and MO are now in trim position. After the earnings are out on HD it may be trimmed if it's still well above 8% and let the other winners run a bit more.
I have written individual articles on CAB, JNJ, EOS, LB, GE, HOG and HD and other companies in The Good Business Portfolio, and other companies the portfolio is evaluating. If you're interested, please look for them in my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and all opinions on the companies are my own.
Disclosure: I am/we are long JNJ, HOG, BA, LB, HD, MO, OHI, GE, CAB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.