Omega Healthcare Investors Inc (OHI): Big Dividend, 3 Big Risks

In particular, Alternative Payment Models and Medicare Advantage were expected to increase, but now the rate of that expansion is in question following the election, and this could be a good thing for the profitability of Omega’s operators and ultimately Omega. As mentioned in the annual report excerpt (above) “[N]ew and evolving payor and provider programs, including but not limited to Medicare Advantage, dual eligible, accountable care organizations, and bundled payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations.”

Worth considering, the following table shows how much of Omega’s operator revenues come from government programs, Medicaid in particular.

These percentages help quantify the material impact government programs have on Omega’s business, and lower regulatory burdens (more free markets) under Republican lawmakers may bode well for Omega over the long-term.

Overly Pessimistic Investors

Another reason that Omega Healthcare Investors Inc (NYSE:OHI) has underperformed is overly pessimistic investors. For starters, short interest recently exceeded 12%.

This high level of short-interest is indicative of investors’ aversion to ACA uncertainty, as well as fears related to rising interest rates and sector rotation out of high dividend stocks such as REITs. Additionally, many income-investors in general invest in REITs for their stability (in addition to the dividends) and Omega appears more risky than other REITs because of the high level of regulatory uncertainty surrounding skilled nursing facilities (i.e. many income-investors have favored other healthcare REITs- a good thing for contrarians interested in Omega).

The current high dividend yield is another indication of overly pessimistic investors. Specifically, management has historically allowed the dividend yield to hover around approximately 6%, but it raises and lowers as the stock price becomes undervalued and overvalued, respectively, in our view (see chart below for historical dividend yield). We believe the current high dividend yield is a signal that the stock is undervalued, and management has the confidence that they’ll be able to keep paying it (and raising it) in the future.