Valuation & Expected Total Returns
HCP’s dividend yield compared to its largest Health Care REIT competitors’ yields is shown below:
– HCP has a dividend yield of 6.4%
– Welltower (HCN) has a dividend yield of 5.0%
– Ventas (VTR) has a dividend yield of 4.4%
The ManorCare debacle has increased HCP’s yield. At one point, the stock’s dividend yield reached over 8%. It has since come down, but is still well above that of its peers. The higher the yield, the better the valuation for REITs. Since REITs are required to pay out the bulk of their income, dividend yield is a good comparative metric in this case.
HCP appears undervalued at current prices relative to its peers. If interest rates rise, the company’s share price will likely decrease. Still, it does appear to be trading at a discount to peers. Investors should, on average, expect positive gains from valuation multiple changes from HCP.
I expect HCP to continue growing its dividend payments at between 3% and 4% a year over the next several years (with a brief pause in growth this year and next year due to ManorCare). This growth combined with the company’s 6.4% yield gives investors expected total returns of 9.4% to 10.4% a year, before valuation multiple changes.
HCP, Inc. (NYSE:HCP) is a high quality REIT. The company will move past the current ManorCare situation – the spin-off will happen this month.
HCP appears undervalued compared to its peers. The company offers investors solid total returns at current prices. Reasonably safe dividend yields of 6%+ that are expected to grow are difficult to find in today’s market. There are certainly advantages to investing in stocks expected to grow dividends.
There are no other Dividend Aristocrats with yields even close to that of HCP’s. The company stands out in this regard.
With that said, the company does not rank particularly well using The 8 Rules of Dividend Investing due to its high payout ratio, mediocre growth rate, and the volatility of its stock price.
While it may not rank well on these metrics, HCP still makes an intriguing choice for investors looking for yield in today’s low rate environment – for investors who can withstand its higher than average stock price volatility and expected sluggish growth in the short-term.
Note: This article is written by Ben Reynolds and was originally published at Sure Dividend.