(Published by Bob Ciura on May 16)
W.P. Carey Inc. (WPC, Financial) stock has declined 15% from its 52-week high set back in June 2016. At the same time, the company has consistently increased its dividend for several years, resulting in a current dividend yield exceeding 6%.
Its 6.4% dividend yield is highly appealing relative to the alternatives. Such a high yield is rare in light of persistently low interest rates.
You can see the full list of established 5%-plus yielding stocks here.
Consider the average dividend yield in the S&P 500 Index is roughly 2%, and the yield on the 10-year U.S. Treasury Bond is just 2.34%.
Not only does W.P. Carey offer a very high yield, it also provides investors with regular dividend growth.
W.P. Carey is a Dividend Achiever, a group of 264 stocks with at least10years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
W.P. Carey's high yield and annual dividend growth makes its stock attractive as an income investment.
Business overview
W.P. Carey is a real estate investment trust, also known as a REIT. It has a market capitalization of approximately $6.7 billion and an enterprise value of $10.7 billion.
It invests in commercial real estate under the sale-leaseback model. This is when a tenant sells a property to a REIT, which then leases it back to the tenant.
As of March 31, the company owned 900 net-lease properties with 214 tenants. It has long-term agreements with high-quality tenants.
The REIT’s portfolio has an average remaining lease term of 9.6 years. The portfolio has 99.1% occupancy.
Source: Q1 Earnings Presentation, page 11
The company has a diversified property portfolio, both in terms of industry and geography. Approximately 67% of its annual rent is derived from the U.S., with 28% from Europe and the remainder from various international markets, including Mexico, Canada, Japan and Australia.
Among W.P. Carey’s top tenants are several strong companies with leadership positions in their respective industries.
This has provided the company with steady growth. The REIT generated funds from operations, or FFO, of $547.7 million in 2016. FFO per share was $5.12, an increase of 2.6% from the previous year.
Growth was driven by cost controls as well as 2.4% growth in net revenue from owned real estate. These catalysts should continue to fuel growth in 2017 and beyond.
Growth prospects
W.P. Carey’s future FFO growth will be driven by rent increases and property acquisitions. First, due to its asset quality, the company can pass along regular rent increases.
Approximately 99% of its leases have built-in contractual rent increases.
Source: Q1 Earnings Presentation, page 13
In addition to raising rent on a regular basis, W.P. Carey can increase its rental income from property acquisitions.
The company made several acquisitions in North America last year, totaling $544 million of investment in 2016. Acquisitions had an average lease term of 20 years.
W.P. Carey also engages in active portfolio management. It occasionally will redevelop or sell properties if it sees better opportunities elsewhere.
It disposed of 33 properties last year, which generated $636 million. The company reinvested the proceeds into higher-quality properties with longer lease terms.
In addition, 2017 redevelopment investments are expected to reach $60 million.
The company turned in a disappointing performance in the first quarter. Adjusted FFO was $1.25 per share, down 4.6% year over year.
The decline was due to a one-time gain recognized in the prior-year quarter as well as lower revenue from planned asset sales. This was partially offset by lower interest expenses due to a lower interest rate on the company’s debt.
W.P. Carey still expects 2017 to be a strong year. Full-year adjusted FFO per share is expected within a range of $5.10 to $5.30.
At the midpoint of guidance, W.P. Carey expects full-year FFO growth of approximately 1.5%. While 2017 is not likely to be a high-growth year, the company should be able to continue raising its dividend.
Dividend analysis
W.P. Carey increases its dividend on a regular basis, often giving investors raises each quarter. In 2016, it paid an annualized dividend of $3.96 per share.
The company is already off to a good start in 2017. It increased its most recent quarterly dividend to an annualized rate of $3.98 per share.
W.P. Carey has increased its dividend each year since its initial public offering in 1998. It holds a nearly 20-year record of consistent dividend growth, which included the Great Recession.
Source: Q1 Earnings Presentation, page 22
The dividend appears secure given the company’s sound fundamentals.
W.P. Carey generates more than enough FFO to sustain its current dividend. Its payout ratio has declined from 80.3% in 2013 to a projected payout ratio of 76.5% based on estimated 2017 FFO.
Going forward, the company’s modest payout ratio along with steady FFO growth should provide for further dividend increases. A reasonable level of expectation is for low to mid percentage increases each year.
Another important consideration for investors buying high-yield stocks is the company’s balance sheet.
It is critical to make sure a company is not overly burdened with debt, which could threaten the dividend if business conditions deteriorate.
W.P. Carey has a solid balance sheet with sufficient financial strength.
Source: Q1 Earnings Presentation, page 20
W.P. Carey has an investment-grade balance sheet. It receives a BBB credit rating from Standard & Poor’s and a Baa2 rating from Moody’s. Both credit rating agencies give the company a stable outlook.
It also has a net-debt-to-EBITDA ratio of 5.7. This is on the high side, but is manageable given the company’s high-quality tenant portfolio and growth potential.
Final thoughts
W.P. Carey’s investment strategy has fueled highly impressive returns over the past two decades. Since the company went public, it has delivered a total return of over 950%, compared with a 249% return for the S&P 500 Index.
The company should have another profitable year in 2017 and is investing to pave the way for continued growth down the road.
Shares currently offer a dividend yield well above its peer group and the S&P 500 Index. In addition, the dividend rate appears sustainable.
As a result, W.P. Carey stock is an attractive investment candidate for income investors.
Disclosure: I am not long any of the stocks mentioned in this article.
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