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Ben Reynolds
Ben Reynolds
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Dividend Aristocrats In Focus Part 43: The Only REIT In The Dividend Aristocrats Index

November 22, 2014 | About:

HCP (NYSE:HCP) is a health care REIT with a $20 billion market cap. The company is the third largest publicly traded health care REIT behind Health Care REIT (HCN) and Ventas (VTS). HCP has increased its dividend payments for 29 consecutive years. The company is a Dividend Aristocrat, and the subject of part 43 of the Dividend Aristocrats In Focus series. HCP’s operations are analyzed below.

Business Overview

HCP is a REIT. The company must pay out at least 90% of its taxable income to shareholders each year to maintain its REIT status. The company operates a portfolio of 1,191 properties in the US and British Isles. HCP operates in 5 distinct segments within the health care industry: Senior Housing, Post Acute/Skilled, Life Science, Medical Office, and Hospital. Each segment’s percentage of total income contributed is shown below to give an idea of the importance of each segment to HCP’s overall operations:

  • Senior Housing: 37% of operating income
  • Post Acute/Skilled: 31% of operating income
  • Life Science: 14% of operating income
  • Medical Office: 13% of operating income
  • Hospital: 5% of operating income

The Senior Housing and Post Acute/Skilled segments are the most important to HCP. These two segments generate 68% of the company’s total operating income. The Hospital segment is by far the company’s smallest, generating just 5% of total operating income for HCP.

Competitive Advantage

HCP’s competitive advantage comes from its diverse portfolio of health care properties and its size. HCP is the third largest health care REIT by market cap. There is very little separating the top 3; the largest has a market cap of $24 billion compared to HCP’s $20 billion market cap. HCP operates nearly 1,200 facilities. As a result, the company is insulated from the risk of any one facility having a catastrophic event. The spreading of risk over nearly 1,200 properties gives HCP the ability to take on large products without “betting the farm” on any one facility.

HCP’s diversified portfolio is responsible for its 29 consecutive years of dividend increases. The company is diversified not only in the number of properties it owns, but also in the type of health care properties it controls within the health care industry. HCP locks its customers into contracts that specify rent increases throughout the course of the contract. The image below shows how HCP’s diversified portfolio and contractual rent obligations give it sustainable growth:

<HCP Return>
Source: HCP NAREIT Presentation

The health care industry is an especially stable area in which to invest. HCP is the only REIT Dividend Aristocrat because it focuses its operations on the stable health care industry. The health care industry is structurally more stable than most other industries because it is one of the few industries that consumers and governments cannot cut back on in times of economic hardship. The dual trends of increased government spending and an aging population will only further strengthen the health care industry.

Growth Prospects & Dividend Analysis

As a REIT, HCP’s growth and dividend payments are bound together. HCP has seen lackluster dividend growth over the last decade of just under 3% per year. Despite weak growth, the company has a strong current dividend yield of nearly 5%. The company’s growth over the next several years looks brighter than the last decade.

In 2004, HCP paid out 97% of funds from operations as dividends. The company has slowly reduced its dividend payments as a percentage of funds from operations down to an expected 72% for full fiscal 2014. If HCP had a 97% dividend/FFO ratio today, it would have a 10 year dividend growth rate of 5.8%; much more respectable than the sub 3% yield the company is seeing today.

Over the next several years, HCP is likely to increase its dividend/FFO ratio. The company now has an extremely safe dividend/FFO ratio for a REIT. The company has substantial room to increase its dividend payments faster than overall company growth for several years.

The factors that have driven FFO growth of 5.8% for HCP over the last decade are still present today. The US (and British Isles) population is expected to continue to skew more toward old age. This is a result of the aging baby boomer generation coupled with said generation having fewer children and better health care which is prolonging life. The result of this is an older average US age than has ever been seen. The image below shows the trend toward old age in the US:

<insert US Demographics>
Source: HCP NAREIT Presentation

An aging population is good news for HCP. As the population ages, more health care facilities of all kinds will be required to care for greater numbers of the elderly. This increasing demand will likely fuel HCP’s growth for years to come.

Recession Performance

HCP performed well through the Great Recession of 2007 to 2009. As mentioned earlier in this article, the health care industry is relatively resistant to the effects of recessions because it is very difficult for both governments and individuals to cut back on health care spending regardless of the overall economic climate. HCP is no exception; the company’s FFO per share is shown below through the Great Recession and subsequent recovery to show how little the company was affected by the recession.

  • 2007 FFO/S of $2.14 (high at the time)
  • 2008 FFO/S of $2.25 (new high)
  • 2009 FFO/S of $2.14 (recession low)
  • 2010 FFO/S of $2.18 (beginning of recovery)
  • 2011 FFO/S of $2.37 (new high)

Final Thoughts

HCP’s solid dividend yield and safety from contracts with rent increases in the health care industry present a compelling case for investors seeing current income. A dividend yield of nearly 5% is difficult to find in today’s low income environment. HCP is currently rated as a hold based on The 8 Rules of Dividend Investing. Despite being in the health care industry, HCP has a high price standard deviation which impacts its ranking. The company has also had lackluster dividend growth over the last decade, but this is expected to turn around over the next several years. All in all, I believe HCP is a solid choice for those in need of high yielding stocks. Other high yielding stocks with long histories of dividend increases include AT&T (NYSE:T), Universal Corporation (UVV), Altria (NYSE:MO), and Philip Morris (PM).

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website

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