Ventas : High Dividend But Poor Total Return

| About: Ventas Inc. (VTR)
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Summary

Ventas dividend yield is well above average at 4.9% making the company an income choice but earnings growth was erratic over the last 5 years.

Ventas has increased its dividend payout in 8 of the last ten years, giving a steady income that grows better than inflation.

Ventas total return under performed the DOW average for the 47 month test period by a large amount 20.92% below the DOW baseline of 46.37%.

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that keeps me ahead of the Dow average.

Source : Ventas

This article is about Ventas (NYSE:VTR) that is being reviewed as a possible choice to add to the medical REIT sector with Omega Health Investors (NYSE:OHI) already owned by the portfolio. Many Seeking Alpha comments on my OHI articles have noted that they own Ventas so I am taking a look at it. Ventas is a good income investment that has a good income record over the last 10 years but looking at total return for my 47 month test period it is very poor. I feel the total return must be positive over a period of good and bad years to be a good investment, so this says Ventas is not a buy for the portfolio. Ventas is a healthcare real estate investment trust (REIT) with its properties located throughout the United States, Canada and the United Kingdom. Fundamentals of Ventas will be looked at in the following topics to help make the decision to buy or look further, 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.

Ventas passes 8 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

The Good Business Portfolio is based on the fact that it does not follow any one type of investment income, growth, value, and total return. Ventas is intended to be in the steady income group.

Ventas is a large-cap company with a capitalization of $21.3 Billion. This size will allow Ventas the ability expand its business and possible buy other smaller medical REIT companies. The biggest company in this sector is Welltower (HCN) at $22.7 Billion capitalization a little more than Ventas with at least 10 other companies in the range of $2 Billion to $8 Billion. There are plenty of small medical REITS for Ventas to buy with its excess cash.

Ventas has a dividend yield of 4.9% which is above average for the market. The VTR dividend has been increased for 8 of the last ten years making it a steady income choice and its dividend is very safe. Ventas is therefore a good choice for the dividend income investor. After paying its above average dividend there is still cash remaining for investment in business expansion and the buying of small bolt on properties.

Ventas yearly FFO/share cash flow at $4.10 is strong allowing the company to have the means for company growth. Ventas has a yearly positive total cash flow of $1.45 Billion. This good cash flow makes the dividend very safe with room for increases each year as the medical sector continues to grow.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.9% more for a yearly distribution of 5.1%. Estimating a forward a three-year CAGR of 5.0% just meets my requirement. This fair future growth for Ventas can continue the uptrend benefiting from the growth of the working population and medical sector.

Looking back five years $10,000 invested five years ago would now be worth over $14,700 today. This makes Ventas a fair investment for the growth investor looking back, that has future growth as the need for medical facilities increases.

Ventas S&P Capital IQ rating is five stars or strong buy with a target price of $82.0. Ventas is 30% under priced at present compared to the target. VTR is a fair buy at the present price for the patient long term investor that wants a steady income. Ventas is being hurt by the strong increase in interest rates which should continue next year.

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. Ventas missed the Dow baseline in my 47.0 month test compared to the Dow average. I chose the 47.0. month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The total return of 25.45% makes Ventas a poor investment for the conservative growth investor. YTD total return for Ventas is at -7.47%, below the market by 16% short term. Ventas Has increased its dividend for 8 of the last 10 years and presently has a yield of 4.9% which is good for the steady income investor. Ventas will soon declare a dividend increase in December 2016 with the quarterly dividend increased estimate from $0.73 to $0.78 or about 7%.

DOW's 47.0 month total return baseline is 46.37%

Company Name

47.0 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Ventas

+25.45%

20.92%

4.9%

As seen in the 5 year price chart below Ventas has a poor chart over 2012-2016 YTD, that shows a steady slow long term growth with a good amount of volatility due to swings in perceived interest rates. The chart is poor because it shows the poor total return through many volatile price swings over the 5 year period when the DOW average is up almost 50% compared to VTR at 30%.

VTR Chart

VTR data by YCharts

Last Quarter's Earnings

For the last quarter on October 28, 2016 Ventas reported FFO earnings that were above expected at $1.03 compared to last year at $0.78 and expected of $1.01. Total revenue was higher at $867.12 Million and higher than a year ago by 4.8% year over year that beat expected revenue by $23.95 Million. This was a good report with bottom and top line increasing. The next earnings will be out in January 2017 and they guided higher this year's FFO earnings to $4.10-$4.13. This leaves cash available for dividend increases and buying bolt on properties.

Business Overview

Ventas is a healthcare real estate investment trust (REIT) with its properties located throughout the United States, Canada and the United Kingdom. The Company operates through three segments: triple-net leased properties, senior living operations and MOB operations. In its triple-net leased properties segment, the Company acquires and owns seniors housing and healthcare properties throughout the United States and the United Kingdom. Through its senior living operations segment, the Company invests in seniors housing communities throughout the United States and Canada, and engages independent operators to manage approximately 304 of its seniors housing communities. It owns approximately 1,300 properties, including properties classified as held for sale; MOBs; skilled nursing facilities; specialty hospitals, and general acute care hospitals. It leases approximately 575 properties to various healthcare operating companies under triple-net or absolute-net leases.

Over all Ventas is a good business with 5% projected revenue growth as the economy and medical facilities start to grow. The good cash flow provides VTR the capability to continue its moderate growth. Ventas distribution among different types of medical facilities is very broad as shown in the graphic below. The economy is showing moderate economic (about 2%) growth right now and the FED may raise rates in December 2016 but is dependent on the United States economy. I believe the FED, when it does raise rates it will be a one and done, they don't want to trigger a slowdown in the economy.

Source : Ventas

A quote from the last earnings call by Debra Cafaro (Chairman and Chief Executive Officer) sums up Ventas approach to its business, "As a result of our portfolio performance and accretive acquisition, we drove good cash flow from operations this quarter too, enabling us to pay our investor a strong and secured dividend of over 4%. We expect our Board to increase our dividend in the fourth quarter of 2016. When we look at the investment market, we continue to see attractive opportunities but we remain highly selective. We focus on deals that would generate reliable cash flow and cash flow growth at an appropriate risk adjusted return. Our capital allocation is also strategic emphasizing sectors with upside and situations like Lillibridge, Atria, Wexford, and Ardent where significant future growth potential exist from consolidation and/or development. "

Takeaways and Recent Portfolio Changes

Ventas is an investment choice for the income investor and moderate growth investor with its 4.9% yield but has poor total return over my test period. Over a ten year period Ventas has had good total return but the recent 4 years do not show the potential of the company. Ventas will not be considered for The Good Business Portfolio until interest rates settle a bit in the new year. VTR is a solid, moderate income producer with potential for upward earnings growth as the need for more medical facilities continues to grow. If you want a steady growing income VTR may be the right investment for you, if you are willing to hold VTR for a long time (at least 5 years) to flatten the swings due to interest rate changes.

Added to position of Digital Reality Trust (NYSE:DLR) now at 0.93% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average dividend. I wrote an article on Digital Reality Trust in September of this year if you are interested.

Trimmed Cabela's (NYSE:CAB) from 3.7% of the portfolio to 2.6%, they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio. The last earnings report was not good and it may be time to take a good profit while I can in case the deal does not go through. Management is spending too much money to keep revenue up causing earnings to decrease.

Increased Omega Healthcare Investors from 4.7% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio has filled in the open portfolio slot with PepsiCo Inc. and will be followed by Kellogg (NYSE:K) or VTR when the next slot is open.

Sold some covered calls on Harley Davidson (NYSE:HOG), sold December 9, 58'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. The HOG price is presently above the strike price and I will move the calls up and out if this situation is the same closer to expiration. I will eventually sell the HOG position since sales have become stagnant and the stock price is high because of take over rumors.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson is 8.0% of the portfolio, Altria Group Inc. is 7.5% of the portfolio, Home Depot is 7.7% of portfolio and Boeing is 9.0% of the portfolio, therefore JNJ and BA are now in trim position with Home depot and Altria getting close.

For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 third-Quarter Earnings and Performance Review 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, Texas Instrument (NYSE:TXN), Digital Investors Trust and Home Depot (NYSE: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, MO, CAB, OHI, HOG, DLR.

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.