Dividend Increase | Omega Healthcare Investors (OHI)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks OHI for the dividend increase!
There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On October 14th the Board of Directors at Omega Healthcare Investors (OHI) approved an increase to the quarterly dividend payment.  The dividend was increased from $0.66 up to $0.67 per share.  That's a relatively meager 1.5% increase, but an increase nonetheless.  Omega Healthcare Investors is a Dividend Contender with 16 consecutive years of dividend increases.  Shares currently yield 6.19% based on the new annualized payout.

The newly increased dividend will be payable on November 15th to shareholders of record as of October 31st.

Since I own 92.531 shares of OHI in my FI Portfolio, this raise increased my forward 12-month dividends by $3.70.  This is the 12th dividend increase I've received from Omega since initiating a position in March 2015.  Cumulatively, Omega Healthcare's dividend has increase 24.1% since I purchased shares.

A full screen version of this chart can be found here.

Omega Healthcare has grown their dividend payment every year starting in 2003.  While it looks like there was a cut in 2015 the $0.54 payment was split in two due to an acquisition.  

Omega's dividend growth isn't the most consistent that I've seen as there was a 7 quarter stretch in 2008/9 that saw the dividend go without a raise.  And more recently another 7 quarter stretch starting in 2018 that ended with this raise.  

Despite the pauses, Omega Healthcare has paid out more dividends every year since 2003.

Of the 15 rolling 1-year periods starting in 2005, Omega's annual dividend growth has ranged from 0.4% to 18.1% with an average of 9.2% and a median of 9.0%.

Of the 11 rolling 5-year periods starting in 2009, annualized dividend growth has ranged from 5.6% to 11.0% with an average of 9.1% and a median of 9.4%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 2003 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

Omega Healthcare's 5-year moving average forward dividend yield is 7.32%.  The current yield of 6.18% suggests that shares are overvalued from a "fair" price by 15%.

Dating back to October 2003, the current yield sits in just the 19th percentile.  In other words, 81% of the time shares have offered a yield higher than current levels.

I consider the fair value range based on dividend yield theory to be the 5 year moving average dividend yield +/- 10%.  Those levels correspond to share prices of $33.29 and $40.67 which suggests shares have 6% to 23% downside.

The normal P/E ratios don't work for REITs due to the large amount of depreciation that is typically associated with real estate holdings.  As such, the REIT sector has come up with various adjustments, each company with it's own reconciliations, to try and give a better representation of the earnings and cash flow which typically come in some form of FFO, AFFO or FAD.

Over the TTM, OHI has managed $3.03 in AFFO and $2.70 in FAD.  With a current price of $43.37 that puts the TTM P/AFFO at 14.3x and the TTM P/FAD at 16.1x.  Based on management's estimates for 2019 AFFO of $3.03 - $3.07 shares are currently valued between 14.1x - 14.3x.  Currently the EV/EBITDA ratio sits at 18.5x.

Those valuations aren't exorbitant by themselves, but in the grander scheme of where Omega's shares have typically traded it warrants at least consideration of trimming a position.  The current P/AFFO of 14.3x on a TTM basis and 14.2x on the midpoint of 2019's guidance are both on the upper end of the historic valuation levels between ~8.5x and 14.3x dating back to 2011.

Given the risks to the business and elevated valuation levels I'm currently debating doing just that at this time.  My current position isn't at the point where I feel that it must be trimmed as it represents ~1.7% of my portfolio and 3.5% of my forward dividends so immediate action isn't necessary.  OHI is currently the 12th largest position in my portfolio by forward dividends which I'm not sure is higher than where I think it should be.

Wrap Up

This raise increased my forward dividends by $3.70 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 2.95% this raise is like I invested an extra $125 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

Thus far in 2019 I've received 41 raises from 36 of the 54 companies in my FI Portfolio.  Combined the dividend increases have boosted my forward 12-month dividends by $291.93.

My FI Portfolio's forward-12 month dividends climbed to $7,561.04.  Including my FolioFirst portfolio's forward dividends of $101.10 brings my total taxable accounts dividends to $7,662.14.  My Roth IRA's forward 12-month dividends increased to $618.96.  My Rollover IRA's forward dividends remain at $2,238.40.  Across all accounts I can expect to receive $10,519.50 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Omega Healthcare Investors' can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Omega Healthcare Investors?  At what point do you consider trimming a position due to valuation or allocation concerns?

Please share your thoughts below.