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.

10 comments:

  1. Thanks for sharing, JC. Ive been reading up on WPC and really like it. I like how diversified they are...across industries and geographically. Congrats on adding this to your div income. Definitely a great purchase!

    R2R

    ReplyDelete
    Replies
    1. R2R,

      I like the diversification that WPC offers across industries as well as geography. Most REITs are very focused across either one but WPC offers a broad swath of operations. WPC offers a great combination of current yield as well as future dividend growth potential.

      Thanks for stopping by!

      Delete
  2. Thanks for the info on this REIT! It does look surprisingly good. They basically have doubled their dividend since 2005 and have a steady history back to 2001. Stock chart looks under control too. Finding it hard not to join you in this purchase!

    ReplyDelete
    Replies
    1. Adam,

      WPC is a pretty good option. 18 year dividend growth streak, solid entry yield, good dividend growth prospects, industry and geographical diversification. Lots to like with WPC.

      Thanks for stopping by!

      Delete
  3. Thanks for the info on WPC. I don't think I've really looked at WPC at all and may have to put it on my watch list to keep a closer look.

    ReplyDelete
    Replies
    1. Tawcan,

      I'd definitely say WPC is a company to look into more if you're looking to add another REIT to your portfolio. There's probably some more downside in the future due to interest rate increases but that will give opportunities to average down your cost basis.

      Thanks for stopping by!

      Delete
  4. Hi JC,

    Congrats on your new position in WPC! It looks like a great stock to hold; I didn't know it was so diversified in its industries and receiving revenue from countries outside the US will probably help it out a bit when rates are hiked.

    Best regards,
    DB

    ReplyDelete
    Replies
    1. Dividend Beginner,

      Both industrial and geographical diversification is awesome for WPC. Once the USD starts to weaken that will increase WPC's results even more.

      Thanks for stopping by!

      Delete
  5. PIP,

    Great purchase! I have made a few purchases of WPC in the last month or so. Great company and awesome entry yield.

    MDP

    ReplyDelete
    Replies
    1. MDP,

      WPC offers a great entry yield and solid dividend growth prospects.

      Thanks for stopping by!

      Delete