Saturday, May 30, 2015
Semi 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've been a bit lax with getting these updates out and I apologize for that but I've been preoccupied with the craziness that is our son Luke. On May 13th I initiated a new position for my portfolio by purchasing 20 shares of W.P. Carey Inc. (WPC) for $63.52 per share. After commission my per share cost basis came to $63.92. Based on the current quarterly dividend rate of $0.9525 my position in WPC will provide $76.20 in annual dividends and carry a YOC of 5.96%. I've been making smaller lot purchases for my portfolio because capital has been a bit light and will continue to be so while my wife and I adjust to living on one income.
There's a lot to like about REITs for dividend growth investors. For starters there's exposure to a new asset class with real estate. They also will generally have fairly stable operations with built in rent increases to continue to fuel higher cash flow and most importantly higher dividend payouts. The last purchase that I made was when I added to my position in Omega Healthcare Investors (OHI), but WPC is a different beast. OHI is concentrated in the health care space, specifically nursing home facilities, whereas WPC is highly diversified with exposure to 25 different industries such as education, health care, retail, government, automobile, hotels and the list goes on and on. W.P. Carey is also diversified internationally with about 1/3 of revenue coming from outside of the United States. All in all they have 219 tenants for their 783 properties in 18 countries. That's a one stop shop as far as real estate exposure.
Revenue has grown a 20% annualized rate over the last 10 years; however, it's only grown at 8% per year on a per share basis. This is because REITs will issue new shares to fund new growth. FFO per share has grown at a 7% annualized rate over the same time period. This has fueled WPC's stellar 7.5% annualized dividend growth rate over the last 10 years. Combine that with a starting yield just under 6% and there's lots to like. There's not too many opportunities to pick up a near 6% yield that is seeing dividend growth in the mid to high single digits. And even better is that WPC has a solid 18 year streak of increasing the dividend, so the precedent is set for continued increases. Especially when you consider that the FFO payout ratio sits at 84% on a TTM basis which seems high but is in line with peers. With FY 2015 FFO forecast between $4.76 and $5.02 the payout ratio would lie between 76% and 80% based on the current quarterly dividend.
REITs in general have taken a hit this year due to the speculation of an interest rate hike sometime in 2015. Since REITs are heavy users of debt to finance their operations this is an important issue to watch. However, with the economy not exactly booming I expect that any potential rate hikes will be slow and closely monitored. The Fed won't want to be too aggressive until the economy proves that it's on solid ground. That means slow and steady rate increases along the way which any competent management team should be able to navigate through.
The Gordon Growth Model calculation can give a quick estimate of the value of a company based on the current dividend, expected dividend growth rate, and your required rate of return or discount rate. Using the current annual dividend of $3.81 with a discount rate of 10% and projecting a dividend growth rate of 7% which is around their 10 year growth rate gives a value of $135.89 suggesting shares are well undervalued at current prices. However, the dividend growth rate will probably slow over time as growth becomes harder to obtain. Replacing the dividend growth rate from above with a more conservative 4% gives a fair value price of $66.04 suggesting that shares are still undervalued by about 4%.
My FI Portfolio's forward 12-month dividends increased to $5,825.49. Including the $55.98 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $5,881.47.
Image courtesy of Stuart Miles on FreeDigitalPhotos.net.