Riding The Age Demographics Wave To Higher Returns
- The percentage of the U.S. and global population over age 65 is growing fast, due to the postwar bump in birth rates known as the Baby Boom.
- On top of this bump, people are living longer due to improvements in medical care and healthier lifestyles.
- This aging population trend presents opportunities for investors to ride the wave to higher returns in several sectors.
In the U.S., we refer to the postwar bump in the birth rate as the "baby boom generation" -- "boomers" for short. While we don't often hear or read about the global baby boom generation, it is a real global phenomenon. In several countries, the boomers are an even larger trend than they are in the U.S. This boomer population wave will slowly ripple across the globe over the next 30 years, resulting in long-term investment opportunities in some sectors, and potentially lower investment returns in others.
In this article, I will endeavor to show the magnitude of the this trend and provide some sector recommendations as well as specific recommendations for capitalizing on the aging population trend. I plan for this to be a three-part series, with this first article focusing on the investment opportunities primarily within the United States as a result of the boomers' retirement from the workforce. The second article will focus on the investment sectors that will potentially suffer from this aging population trend in the U.S.; the third article will focus on the global investment opportunities and risks resulting from the global boomer wave.
We Are Getting Older
We all know we are getting older -- the birthdays just keep coming like clockwork. Unlike birthdays, it is a little harder to appreciate that, as a population, we are getting collectively older in the U.S. and around the globe.
The chart above is from a United Nations report, revised in 2013, on the aging trend globally and in the U.S. While total population continues to grow in the U.S. and globally, by far the largest percentage increase is in the proportion of the population over 65 years old. In the U.S., between 2010 and 2050, this segment of the population is expected to realize a 111% increase. Globally, the population shift is even larger, with a 181% increase in people over the age of 65.
Source: Population Reference Bureau.
The chart above shows the growth in absolute terms (rather than percentages) of the expected global population over the age of 65 through 2050. A similar dataset for the U.S. population is provided below.
In both these charts, besides the sheer magnitude of the over-65 population growth through 2050, the reader should note that the slope of the curve abruptly increased around the year 2010. After 2010, the over-65 population growth rate increases significantly. In the U.S. and globally, we have only recently begun to see this major growth rate increase. 2010 is the year the first baby boomers hit age 65.
The chart below shows the increase in life expectancy in the U.S. through 2050, courtesy of the UN World Population Project.
We are getting older as a society, and on top of that, we are living longer. The chart above is a forecast of the increase in life expectancy in the U.S.; global life expectancy is increasing even faster than in the U.S. If you sit down and think a few moments about the effects of these changes, it is nothing short of profound. This aging society trend will have deep and wide-ranging impacts on housing, health care, government expenditures, insurance, discretionary consumer spending, automobile manufacturing, financial services, and probably a host of other sectors I haven't thought of yet.
Riding the Wave to Higher Returns
I've been investing for nearly 30 years. Over that time I've learned that I always to better with investments that have a long-term macro trend driving growth in the sector or the specific company. Some will remember the "peak oil" trend, when most of the world was convinced we had passed the peak in production, and oil production would slowly decrease while demand continued to grow. I rode that wave for several years, up to 2008, and did very well with my investments. I also did very well with my investments in health care, and got out when the sector started looking overvalued. (In retrospect, I got out too early, as health care is still going strong -- and is still overvalued.) Lastly, I was lucky enough to have recognized that the Federal Reserve's QE program was going to push bond yields down and prices up. The QE bond wave has been a nice ride, but will likely come to an end soon.
I believe the impact of the trend toward an older population will dwarf the earlier trends from which I've benefited. A doubling of the population over the age of 65, and the trend of living longer, even if only by a couple of years, is a tsunami in comparison to the other waves I've been able to ride. The aging population trend impacts a much broader slice of our economy, along with the associated investment opportunities, for a much longer period of time than anything I have been able to capitalize on in the past. The only trick will be in identifying those sectors and companies that will benefit from an aging population. The paragraphs that follow present a few of my ideas for riding this wave.
A clear winner in this area will be senior housing and independent living facilities. While it could be difficult to invest directly in senior housing, one way to capitalize on this growth area is through Real Estate Investment Trusts, or REITs. My REITs of choice in this area are listed below, with a short summary of each. While none are purely invested specifically in independent living facilities, all have a sizable portion of their property portfolios allocated to senior housing in the form of independent living, assisted living, skilled nursing, and/or memory care facilities.
Health Care REIT (NYSE: HCN) has a market cap of $25 billion and is one of the few REITs included in the S&P 500. About 64% of the portfolio by value is in senior housing, split between properties that HCN operates (38%) and those that are leased on a triple-net basis (26%). Looking at the health-related properties, medical office buildings and skilled nursing facilities make up another 16% and 14% of the portfolio, respectively, and the rest is split between hospitals and research facilities. Apart from the skilled nursing facilities and hospitals, which depend heavily on Medicare and Medicaid, HCN's tenants have very little dependence on the government. Across its portfolio, 87% of its revenues are from private pay clients.
HCN sports a dividend yield of 4.7% and has been a steady dividend grower for years. Over the past five years, HCN has grown its dividend at a 3.2% annual clip. Like most REITs, HCN has taken a beating lately with all the noise about the Fed raising interest rates. HCN has come off its 52 week high of $84.88 down to $70.26 currently. I have not yet initiated a position in HCN but it is on my watch list. I'm looking for a price of $66 or a 5% yield as my entry point.
A point to make here that will apply to all the REITs I have listed in this article is on the issue of equity REIT prices and interest rates. There is clearly an investor concern that if the Fed raises interest rates, REIT prices will suffer. While I believe there will be an initial impact on equity REIT prices if there is any significant increase in interest rates, I do not believe the impact will be lasting. Mr. Brad Thomas has written about this issue extensively in various REIT articles on SA. I have looked at the correlation of e-REIT prices with interest rates in an article that can be found here. While there is sometimes an initial impact to REIT prices resulting from increasing interest rates, the continued growth in portfolio value, funds from operations, and dividends is a stronger and longer term impact on REIT share valuation.
HCP, Inc. (NYSE: HCP) is a blue-chip REIT included in both the S&P 500 Index and the Dividend Aristocrats Index following its 29 consecutive years of dividend hikes. With a $18 billion market cap, HCP is nearly as large as HCN. At 37%, senior housing makes up the largest segment of HCP's portfolio, followed by post-acute facilities at 31%. Life sciences, medical offices, and hospitals fill out the rest of the portfolio at 14%, 13% and 5%, respectively. HCP pays a very respectable dividend at 5.84% and has managed to grow that dividend at a 3.4% over the past five years.
HCP is off roughly 28% from its 52 week high and its current price is within my buy range now but I have not yet initiated a position in HCP. The reason being that one of HCP's major tenants, ManorCare is currently under investigation by the Department of Justice (DOJ) for potential over billing for Medicare and Medicaid covered patients. While this does not impact HCP directly, a significant finding and subsequent fine and costs to ManorCare from the DOJ investigation could crimp HCP's rent collection from this major tenant. I'm holding off on an investment in HCP until the ManorCare investigation becomes a bit more clear.
Omega Healthcare Investors, Inc. (NYSE: OHI), until recently, was a small senior nursing facility (SNF) REIT. OHI only recently acquired AVIV, and the combined company now has a market capitalization of just under $7B -- not as large as either HCN or HCP but big enough to impart a significant footprint in the sector. OHI is almost a pure play in the SNF field.
OHI sports a dividend yield of 6% despite what several of the financial websites have listed. OHI split their last quarter dividend into two separate payments and several of the websites have picked up only the last one month payment and are reporting incorrectly only a 2% yield. Don't be fooled, the yield really is 6% today and going forward. Over the last 5 years, OHI has grown their dividend 8.1% annually. With the AVIV merger under their belt, OHI should be able to continue or accelerate that growth in distributions. OHI is 26% off from its 52 week high. I own shares of OHI today and I've got a couple PUTs in place that may increase my holdings if exercised.
Sabra Health Care REIT, Inc. (NASDAQ: SBRA) is a smaller REIT with a market cap of about $1.9B but growing through acquisitions. Over 50% of SBRA's revenue and funds from operations(FFO) is generated through SNF or assisted living facilities. About 54% of SBRA's revenue is generated from private pay sources.
SBRA pays a 5.9% dividend. Over the last 4 years, SBRA has increased its dividend payout by an average of almost 12% annually though I expect that to slow a bit going forward to something in the neighborhood of 10%. SBRA has a BB+ credit rating and is working towards joining the investment grade club. SBRA is off almost 30% from its 52 week high and, in my opinion, presents a buying opportunity now. I am currently long SBRA and SBRA is currently in my buy range. I may add more to my holdings.
Ventas, Inc. (NYSE: VTR) is one of the bluest of blue chip REITs and is also included in the S&P 500. With a market cap of $22 billion, VTR is one of the largest holdings in most REIT index funds. Due to its size, VTR cannot grow at the rate that some of its smaller rivals can. But with its size comes stability and financial strength. About 56% of VTR's property portfolio is invested in senior housing, split between 26% in "triple net" properties, 26% in domestic operating properties, and 4% in international operating properties. Another 19% of the portfolio is invested in post-acute care facilities, 15% is invested in medical office buildings and the rest is spread among hospitals, loans and other properties. So, in VTR, you get a nice, diversified sampling of the facilities that aging Boomers will be using in the decades ahead.
VTR sports a current dividend yield of 4.75%. And like the other REITs listed above, VTR is also a serial dividend raiser. VTR has grown its dividend at a 7.5% annual clip over the past five years. I'm not yet an owner of VTR but it is on my watch list. VTR is off roughly 23% from its 52 week high but it is not quite into my buy range. My buy range is $63/share or a 5% yield, whichever comes first.
All of these REITs are well covered on SA. While I didn't want to repeat in this article all of the detailed analysis already available on these REITs, the reader is encouraged to use the SA search function and read up on these potential investments.
Senior citizens utilize a lot of healthcare services and products. I've seen estimates claiming that 60% to 80% of an average person's healthcare expenditures occur in the last 10 to 15 years of their life. Obviously this is a highly variable number because of a person's specific circumstances. But the take away message is clear. Seniors spend a lot on healthcare. With the senior population doubling between now and 2050 in the U.S., spending on healthcare products and services is going to soar.
The healthcare sector even today is enormous with over 17% of the U.S. gross domestic product being spent on healthcare. The number of companies in the healthcare sector is likewise enormous. Because of the size of the healthcare sector and because it is an area in which I'm not well schooled, I rely on the professional management of well run mutual funds for my investments in the healthcare sector. There is no shortage of well run funds in the healthcare sector. Two that I like, are well diversified, and have low expense ratios are Fidelity Select Healthcare Portfolio (NYSE: FSPHX) and Vanguard Healthcare Fund (NYSE: VGHCX). These two funds are ranked number 1 and 11 respectively by U.S. News and World Report. I actually prefer the Vanguard fund because it is run a bit more conservatively, carries a lower expense ratio, and has held up a little better in down markets. However, you won't go wrong with either fund or many others that are available.
The healthcare sector has been on fire lately and, in my opinion, the sector is somewhat overpriced in general at this time. I'm waiting for a bit of a correction or dip to put more money to work in this sector. There are probably some individual stocks that are fairly valued within the sector but, as I stated above, this is an area where I rely on the professional diversification I get through mutual funds.
Many seniors at some point choose to turn over the management of their assets to a professional. As the number of retired persons in the U.S. goes up, the demand for professional financial management services will go up as well. There are literally hundreds of wealth management firms and many banks have a wealth management division. This area of the financial sector was already growing fast before the boomers started to retire. I think the challenge here is to find those management firms that will benefit significantly from the increased demand for those services. While all of the large banks have wealth management divisions, the revenue contribution from the wealth management business is often a small fraction of the bank's total revenue. For example, the revenue contribution from wealth management services at Morgan Stanley (NYSE: MS) is 42% while at Wells Fargo (NYSE: WFC) it is only 17%. I've got MS on my watch list. MS is down off its 52 week high but not by much. It carries a yield of 1.57% but that dividend has grown a whopping 24.6% (Compound Annual Growth Rate) over the last 5 years. If MS can keep that dividend growth momentum up, it will be paying a handsome dividend in 10 years time. Still, I'm waiting for a correction or a dip in the valuation of MS before I initiate a position.
Our population is aging. By 2050, the proportion of the population over age 65 will be double what it is today. We will also presumably be living longer when the year 2050 rolls around. These trends will have a profound effect on our economy, government expenditures, and financial markets because of their breadth and duration. Long-term investors should be looking at this aging population trend for investment opportunities in companies that will prosper as a result of the shift to an older population.
My list of investment opportunities above are in my order of preference for investment. In other words, I'm confident that senior housing and health care will thrive as a result of the increase in our elder population. I'm a bit less certain about the financial management area. I also view these as areas for long-term investments. The aging population trend will be with us for a very long time -- certainly long enough for the next generation of investors to benefit.
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