This article is about Omega Healthcare Investors (NYSE:OHI) and why it's an income and dividend growth company that has been increased to 4% of The Good Business Portfolio. Omega Healthcare Investors, Inc. 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 the United Kingdom. Fundamentals of Omega Healthcare Investors will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.
Good Business Portfolio Guidelines.
Omega Healthcare Investors passes 9 of 10 Good Business Portfolio Guidelines. The only guideline OHI fails is capitalization but will grow to my $7 Billion target going forward. 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 $6.14 billion. Its portfolio of real estate investments include over 969 properties located in 41 states and operated by 83 different operators. Its portfolio includes healthcare facilities and mortgages on healthcare facilities. They are the largest company providing skilled nursing care facilities. This size will allow OHI the ability to buy and add smaller companies to continue its great growth. Omega Healthcare Investors has cash and credit facilities of $750 Million to be used when the opportunity occurs.
Omega Healthcare Investors has a dividend yield of 7.0% and its dividend has been increased for ten of the last ten years. The payout ratio of FFO is high at 70% because of its REIT designation. Omega Healthcare Investors therefore is a dividend growth and income story as the demand for the skilled nursing care segment continues with the aging population. The dividend is expected to be increased in mid July and is estimated to be increased $0.01/quarter or a 2.0% increase and equal to 8% per year. This will be the 16th straight quarterly dividend increase for OHI.
Omega Healthcare Investors income is great at $0.83/share 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 continued growth investments and increase its dividend for many quarters to come.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% more for a yearly distribution of 5%. Omega Healthcare Investors has a three-year CAGR of 16% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $22,423 today (from S&P IQ). This makes Omega Healthcare Investors a good investment for the income and dividend growth investor with its steady 7% increasing dividend and earnings growth.
Omega Healthcare Investors S&P Capital IQ rating is a hold with a target price of $38 using the 5 year Price/FFO ratio of 11.2. Omega Healthcare Investors is under priced at present and a good choice for the income and dividend 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 Investors did better than the Dow baseline in my 41.2 month test compared to the Dow average. I chose the 41.2 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the losing year of 2015 and the slightly higher year of 2016 YTD. 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 great total return makes Omega Healthcare Investors appropriate for the growth investor with the 7% 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 for ten years of the last ten years. The dividend has been increased in each of the last 15 quarters and is now 0.58/Qtr. with the expectation of any other $0.01 increase next month.
DOW's 41.2 month total return baseline is 35.9%
41.2 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Omega Healthcare Investors
Last Quarter's Earnings
For the last quarter on May 5, 2016 Omega Healthcare Investors reported earnings that beat expected at $0.83 FFO compared to last year FFO at $0.77. Revenue was much higher at $212.9 Million much higher than a year ago of $133.4 Million mainly due to the large acquisition last year. This was a great report. OHI increased their guidance to $3.25 -3.30 FFO for the year. Earnings for the next quarter are expected to be at $0.78 FFO. The steady growth in Omega Healthcare Investors should provide a company that will continue to have above average total return and provide steady income for the income investor.
Omega Healthcare Investors, Inc. 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 the United Kingdom. It operates through the segment, which consists of investments in healthcare-related real estate properties. It 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. Its portfolio consists of long-term leases and mortgage agreements. Its portfolio of investments included approximately 969 healthcare facilities, located in over 41 states and the United Kingdom that are operated by over 83 third-party operators. The portfolio consists of approximately 780 SNFs, 85 ALFs, 15 specialty facilities, one medical office building, and fixed rate mortgages on 55 SNFs and two ALFs. OHI is a growing segment of the American economy as the population lives longer and needs more assistance in their later years. Omega Healthcare Investors is continuing its growth and in the first quarter completed $494.0 Million of new investments and has so far added $220.0 Million of new investments in the second quarter. Effective October 2016 CMS rates will go up 2.1% keeping a slight growth in revenues. OHI has two overhangs which I believe have overly depressed the company price. First is that Medicare rates will be cut, it's also its a Presidential year, no one would dare to propose cutting Medicare in this year. Second is that rising interest rates will hurt the company's earnings. The economy is showing weakness right now and I think the FED will be on hold for at least 3 months if not longer
Takeaways and Recent Portfolio Changes
Omega Healthcare Investors is a investment for the income and dividend growth investor with a dividend increase of 2% expected in mid July. Considering Omega Healthcare Investors steady dividend growth of 8%, its current dividend yield of 7% and its total return better than the Dow average, Omega Healthcare Investors is a great buy for the income and dividend growth investor. One negative for Omega Healthcare Investors is when the Fed starts raising interest rates that will cause rising interest expense, giving Omega Healthcare Investors a headwind for a year. Omega Healthcare Investors is also in a defensive business helping to dampen the market swings.
Bought more OHI to make it a full position of 4.0% of the Good Business Portfolio. So now we just watch it grow until it reaches 8% of the portfolio. .
Trimmed Johnson & Johnson from 8.9% of the portfolio to 8.4% of the portfolio, must have good portfolio management and not let any one company get much above 8% of the portfolio. I love JNJ, it pays a 2.8% dividend grows at 8-10% a year and is defensive, JNJ should be in all portfolios.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold May 50's June 52.5's and June 50.0's. If the premium gets to 20% of the sold premium price I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. On 5/10/2015 bought to cover the HOG May 50's since 80% of the premium has been achieved as an income gain. On 5/12/2016 bought to cover the HOG June 52.5's since 80% of the premium has been achieved as an income gain. On 6/1/2016 bought to cover the HOG June 50.0's since 80% of the premium has been achieved as an income gain. If HOG goes up in the next few weeks the calls can again be sold for a double in the same month. All HOG covered calls have been bought to close.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the five top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.4% of the portfolio, Home Depot (NYSE:HD) is 8.1% of portfolio, Boeing (NYSE:BA) is 7.9% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.2% of the portfolio, and Walt Disney (NYSE:DIS) is 7.0% of the portfolio, therefore HD and JNJ are now in trim position with Altria Group Inc. , Boeing, and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest 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 the opinions on the companies are my own.
Disclosure: I am/we are long BA, JNJ, HD, DIS, OHI, MO, HOG.
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.