Omega Healthcare (OHI) represents a very attractive high-yielding undervalued income opportunity that has also generated significant above-average capital appreciation. The current attractive valuation of this high-yielding REIT can best be seen by reviewing its price to Funds From Operation (FFO) correlation over the past eight years. Since calendar year 2005, long-term shareholders have enjoyed capital appreciation of 9.6%, while simultaneously receiving dividend income that increased the total return to 14.3% per annum.
This article is intended to look at Omega Healthcare's "essential fundamentals at a glance" through the lens of the F.A.S.T. Graphs™ research tool based on Funds From Operations (FFO). When evaluating REITs, operating earnings do not provide a clear picture of valuation. For a more detailed explanation of the proper method to evaluate REITs based on price to Funds Form Operations, see the following article by fellow Seeking Alpha Contributor and No. 1 author on REITs, Brad Thomas, entitled REITs Are Bubblicious, Especially The Dividends That Are Repetitious. For a more detailed look at Omega Healthcare, see this article also published by Brad Thomas earlier this year entitled Seeking Alpha And Diversifying With Omega.
A Live F.A.S.T. Graphs™ on Omega Healthcare
The F.A.S.T. Graphs™ on Omega Healthcare illustrates that this above-average yielding specialized REIT can be purchased at a sound valuation. Therefore, we rate Omega Healthcare a buy based on the following fundamental metrics:
· a P/FFO of 12.6, which is reasonably close to its historical P/FFO of 11.6
· a current yield of 7.3%, which is approx. 3 ½ times the current yield on the S&P 500 of 2%
· a current price that sits at a discount to its income justified valuation (light purple line on graph, which represents a REIT's distributable income)
Moreover, in order to conduct your own research and get a clearer perspective on Omega Healthcare's valuation, click on the picture above that links you to a fully functioning sample F.A.S.T. Graphs™ on Omega Healthcare and research this above-average yielding REIT deeper and faster. Be sure to run this graphic utilizing the Funds From Operation (FFO) metric that is more appropriate than operating earnings for REITs.
Run this "tool to think with" through its paces. Use the tan navigation bar to the left of the graphs and draw multiple graphs ranging from 2 to 20 years of history. Discover how this tool instantly provides a clear picture of the business behind the stock and dynamically re-evaluates valuation and reveals the clear correlation between the company's earnings and price.
Note: This link will be live for 90 days beginning October 22, 2012. For more advanced instructions on how to utilize the live graph follow this link.
Summary and Conclusions
Omega Healthcare is our above-average yielding REIT idea of the week. At its current quotation, Omega Healthcare appears to be currently fairly valued based on historical norms. This is a long-term call for investors seeking an above-average yield, above-average capital appreciation and a potential for a growing dividend income stream that can be purchased at an attractive price. Consequently, we believe this is a high-yielding option for investors seeking a high income and capital appreciation candidate worthy of further due diligence.
Disclosure: No position at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.