- Omega offers a very attractive risk/return income play boasting a high yield, a stellar dividend track record in a sector with great long-term demand and growth prospects.
- Omega has mastered the pandemic in great fashion.
- A historical analysis shows why it is a good idea to immediately reinvest dividends back into Omega.
Omega Healthcare Investors (NYSE:NYSE:OHI), a quality triple-net equity REIT, is paying out its juicy dividend to investors on May 16. Omega has mastered the pandemic in great fashion proving that its seismic stock price collapse in March 2020 when the stock nosedived from $44 down to $15 was massively overblown and arguably presented the best buying opportunity in the last 10 years.
With the stock now closing in on the $40 barrier the business is fairly priced and still boasts an almost 7% fully-covered dividend. The biggest risk to OHI's business right now is in my view another mutation of COVID-19 for which existing vaccines prove ineffective. However, even in that case I wouldn't expect a significant drop in the stock price based on the assumption that skilled nursing operators have learnt their lesson on how to protect their inhabitants as best as possible against easily transmissible diseases.
Right now it looks unlikely that the stock is up for a sizable correction and thus I am turning to other strategies to discover if there are practical methods to boost dividend income and returns.
By backtesting different investment scenarios for Omega Healthcare Investors I will show why on average it is a particularly good time to reinvest dividends right on the payment date and not hold on to them.
Let's get straight into the analysis!
The hypotheses fueling that analysis are:
1) Omega is a high-yield stock and very popular among investors that reinvest their dividends automatically or repeatedly manually, or in other words, dividend investors.
2) Thus, we could on average expect the stock price to do the following:
... at best to climb upwards following the dividend payment date;
... at least to show some sort of stability and support in whatever area the stock traded on the dividend payment date.
I have analyzed how Omega stock behaved over the last 68 dividend payment dates, i.e., did it rise, did it fall and by how much? These 68 observations cover the period from February 2004 to November 2020. The results have been grouped into 8 different categories, which differentiate themselves in terms of how many trading days have already passed since the respective dividend payment date.
To make this more practical, let's illustrate this with an example by using one of Omega's latest pre COVID-19 dividend payment dates, November 15, 2019. I am not excluding 2020 period from the analysis but as mentioned above COVID-19 hit Omega's stock extremely hard in both directions and those movements are certainly not typical. Thus, results for 2020 should be treated with caution.
OHI closed at $41.18 on November 15, 2019, right on its dividend payment date. In the 30 trading days following that dividend payment date, the stock price closed at the following levels at different points in time:
- Closing price 1 trading day after dividend payment date: $41.59
- Closing price 2 trading days after dividend payment date: $41.78
- Closing price 3 trading days after dividend payment date: $41.62
- Closing price 4 trading days after dividend payment date: $41.00
- Closing price 5 trading days after dividend payment date: $40.89
- Closing price 10 trading days after dividend payment date: $41.58
- Closing price 15 trading days after dividend payment date: $42.72
- Closing price 20 trading days after dividend payment date: $41.15
- Closing price 25 trading days after dividend payment date: $41.62
- Closing price 30 trading days after dividend payment date: $42.35
In that example, we clearly observe a high level of overall stability in the stock price in the first five trading days post the dividend payment date. Afterwards the stock wobbles around before shooting slightly higher. However, while the first five days post dividend payment are more likely to still be affected by the impact of reinvested dividends the same can certainly not be said anymore after 10 days, 15 days or even 30 days. Within that period lots of other fundamental and technical reasons will have affected the stock price and merely serve for illustrational purposes.
While that is very impressive, it is just one observation. Is it representative? Are these erratic movements? How does it look for the entire observation period of more than 15 years as mentioned above?
Figure I: Breakdown of stock price appreciation following each dividend payment date
While we can visually plot all 68 dividend payment dates it is excruciatingly difficult to interpret it.
By restricting it to just 5 years, it becomes easier to follow the developments but it is still difficult to detect trends and patterns particularly given that the 10-day, 20-day and 30-day post dividend payment price developments are decoupled from the actual dividend payment event in the first place. What we can clearly see though is that there are significant swings to both directions.
Thus, let's have a look at the aggregated (= average) yearly results instead.
Figure II: Breakdown of average stock price appreciation following annually aggregated dividend payment dates
Contrary to expectations, the first five trading days show on average very stable prices across all years and hardly any movement at all whereas the further away we depart from the dividend payment date, the stronger stock price appreciation we are observing.
Omega's yield has come back down to 7% and thus roughly in-line with its long-term average. Naturally, high yield also contains high risk, but for long-term oriented dividend investors, Omega's industry, regardless of potential interim turmoil regarding some of its operators or significant changes in America's healthcare system, will deliver strongly.
Dividend investors know that reinvesting dividends is very powerful, as it allows to automatically or manually redeploy capital into the company and, over time, enable investors to buy more and more stocks just via dividends, which in turn increases their dividend income and allows them to invest even more capital back into the stock.
What's not so clear is whether these automatic reinvestment processes are actually visible in the stock price development. Interestingly, historical analysis shows no particularly distinct stock price increases on or immediately after the payment date. Instead, this period is characterized by very stable stock prices and allows investors to more safely redeploy funds and/or add additional funds, thereby preserving capital and laying the groundwork for growing future dividend income.
Omega currently offers a very attractive, certainly not risk-free, risk/return income play. It is a stock with a very high initial yield, a very good dividend track record and operating in an industry with long-term demand. Short-term uncertainty regarding some of the company's operators and looming changes in the healthcare system are valid risks to consider; however, in the long term an initial 7% yield, should offer enough protection and income to weather potentially deteriorating macroeconomic and political conditions.
This article was written by
Analyst’s Disclosure: I am/we are long OHI. 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.
I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.
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