Friday, March 6, 2015

Recent Buy

Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.

I know I know my plan was to build up cash and stay away from investing for the next few months.  But I just couldn't help myself since I hadn't made any purchases since back in November 2014.  I was sitting on about $5k cash in my brokerage account and had targeted some companies trading near price levels that I feel are good long-term entry points and went ahead and set some limit orders.  Don't worry I still have an ample emergency fund and now that I have income coming in again I'll be able to build it up a bit quicker.  I'd been trying to find some higher yielding companies that also have clear runways to continue increasing the dividend at a solid rate.
On Wednesday, March 4th I initiated a new position in Ventas, Inc. (VTR).  Ventas is a real estate investment trust that leases out properties in the healthcare industry.  There's a lot of worry about what will happen to REITs once interest rates start to rise but long-term investors shouldn't worry and a slow rise should be easily managed by management.  There's no doubt that the healthcare industry has a huge tailwind with the aging population of baby boomers.  With life expectancy creeping up year after year that brings along higher healthcare costs for those same boomers.  Ventas is diversified in their properties with 1,500 properties spanning senior housing communities (746), medical office buildings (275), skilled nursing (365), and hospitals (47).  They're even diversified globally owning properties in the United States, Canada, and the United Kingdom.

I purchased 22 shares of VTR for $72.9699 per share.  After commission my per share cost basis comes to $73.33.  Based on the current annual dividend of $3.16 these shares will provide $69.52 in annual dividends and carry a YOC of 4.31%.  I actually ended up setting my limit order last week and missed the purchase a few days ago.  I was hoping to get shares before the shares went ex-div but forgot my purchase order was still in place and purchased shares on the ex-div date.  Oh well, what's one quarter in a potential life long holding?

Historically, Ventas has provided owners with excellent dividend growth.  The 5 year dividend growth rate is at 8.11% and the 10 year growth rate is 8.18%.  Ventas doesn't have a great streak of dividend increases because they held it constant during the financial crisis.  However, they have gotten back to regular annual increases since then and prior to the financial crisis had a 9 year streak.  Since 1999 Ventas has increased distributions every year except for one, and the lone outlier was in a very troublesome economic environment in which they maintained the payout level.  I take that as a very prudent sign from management and am much more tolerable of a management erring on the side of caution.

Running Ventas through a Gordon Growth Model valuation with a 10% discount rate and a 5% growth rate gives a fair value of $66.36.  A 9% discount rate with 5% growth works out to a fair value of $82.95.  Reordering the calculation and solving for the required growth rate shows that Ventas needs to grow their dividend at 5.46% per year to justify my initial price of $73.33.  At a 9% discount rate the required growth rate drops to 4.50%.  Considering all of the growth rates are well below VTR's historical growth rates I'm pretty happy with my purchase price.

Ventas paid out $2.965 in dividends last year and had $4.48 in normalized FFO.  That gives a payout based on nFFO of just 66.2% and leaves plenty of room to continue growing the dividend.  Management is guiding for $4.63 to $4.71 in nFFO for 2015 which means the current quarterly dividend of $0.79 would only eat up 68.3% to 67.1% of nFFO.  I purchased shares for 16.4 times nFFO and between 15.8 and 15.6 times forward nFFO.

Overall I think the current price of Ventas represents a decent value.  I wouldn't say it's at a point where you should be backing up the truck but it's a relatively stable company with consistent growth that should fare well even in an economic slowdown.  We can't exactly just do without health care.  For a starter position I'm okay with paying around fair value for a high quality company that should continue to provide consistent dividend growth.  Especially since the starting yield is solid at 4.31%.

My forward 12-month dividends for my FI Portfolio increased to $5,279.34 and total taxable accounts, Loyal3 and my FI Portfolio, forward dividends now sit at $5,334.52.

I've updated my Portfolio page to reflect this purchase.

What companies are high on your watch list for potential buy candidates?  What do you think of Ventas, Inc. as a dividend growth investment?

*Well looks like I was a bit early on this buy based off the early morning market.  That's why you buy for long term value and look for opportunities to buy on the dips.  I won't be adding on this dip just yet because capital is a bit light at the moment.  But somewhere between $66-68 would get me interested in adding shares given my current available capital forecasts for the next few months.

8 comments:

  1. Really like this purchase, JC. Ive been keeping an eye on it too and found that mid to high 60s to be the fair price. I think I saw Brad Thomas also do an analysis in the recent weeks and came up with $66 fair/buy price. While it was in the mid to high 70s, I decided to leave it out of my watchlist, but if it drops anymore...I might have to consider it seriously. I really like their diversification - both in the type of facilities owned and geography - and it would be a great complementary fit in my portfolio with OHI.

    Best wishes
    R2R

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    Replies
    1. R2R,

      I know it isn't the best price right here but I was comfortable with the value to initiate a position here and look to buy on dips to lower prices. Would love to see the mid-$60s and hopefully we get some overreaction whenever the Fed does decide to increase the rates. I'm looking to do the same with OHI if the price can come down just a bit.

      Thanks for stopping by!

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  2. After selling 95% of my VTR position around the 80 level, I just started buying some of it back here today. I expect VTR to continue falling to the 66 level where I plan to add back my full exposure. But otherwise a great buy PIP. Thanks for the commentary.
    Regards,
    MrStockFox

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  3. Congrats on another great company! I've been eying this one and OHI for ages and would love to own both with you. When I was researching them, I liked the little videos they had on their site and wish more company's would do something like that. Take it easy!

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  4. Nice purchase PIP. I don't know much about this stock, but with ARCP eliminating the dividends, I am looking for some REIT stock to replace my ARCP holdings. Need to look at this one closely.

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  5. I just started my portfolio. Thanks for bring my attention to VTR. This company looks solid. I just added it to my watch list. Thanks for sharing.

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  6. Nice buy here, PIP. I've been looking into REITs lately and VTR looks interesting. I bought STWD a while back...

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  7. Hi JC,
    That looks like a solid long-term investment. The population will only increase so there will always be a higher demand for medical services and the buildings to house them. Likewise for senior living properties.

    Best wishes,
    -DL

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