Beaten Down Stock with a Huge Cash Payout
Today’s article features a high-yield stock with a growing payout: Omega Healthcare Investors Inc (NYSE:OHI).
As the name suggests, Omega invests in the healthcare sector. But rather than being an operator of hospitals and clinics, Omega invests in healthcare real estate. Right now, the company’s portfolio consists of investments of 999 operating facilities located in 42 states in the U.S. and the U.K. Approximately 84% of the portfolio is invested in skilled nursing and transitional care facilities, with the remaining 16% invested in senior housing properties. (Source: “Investor Presentation,” Omega Healthcare Investors Inc, last accessed December 8, 2017.)
These healthcare properties provide Omega with a steady stream of rental income. In turn, Omega distributes some of that income to shareholders in the form of dividends.
Last month, the company paid a quarterly dividend of $0.65 per share, representing a 1.6% increase from its previous payout. As a matter of fact, Omega has raised its common stock dividend every quarter for 21 consecutive quarters. (Source: “Dividends,” Omega Healthcare Investors Inc, last accessed December 8, 2017.)
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Usually, when a company achieves such an impressive dividend increase track record, investors reward it with a higher share price. But, with OHI stock, that hasn’t really been the case recently. Over the last three months, shares of Omega Healthcare Investors tumbled 15.6%.
What’s the concern? Well, the problem is with one of Omega’s skilled nursing home operators, Orianna Health Systems. To put it simply, Orianna hasn’t been paying its rent, which resulted in Omega earning less than what it could.
Like any landlord, a non-paying tenant is bad for Omega’s business. But does this mean investors should ditch Omega stock? Not really.
You see, Omega’s portfolio is diversified across 77 different operators. Even though Orianna is a relatively big operator with 42 properties, it accounts for just five percent of Omega’s annualized rent and interest income. Therefore, the damage on Omega’s company-level financials from Orianna will likely be limited.
At the same time, Omega is in progress to transition Orianna’s properties to new operators. In July 2017, the company transitioned nine of Orianna’s skilled nursing facilities in Texas to one of Omega’s existing operators.
Furthermore, despite the problem with Orianna, Omega still has more than enough resources to cover its distributions. In the third quarter of 2017, the company generated funds available for distribution (FAD) of $150.6 million. This allowed Omega to achieve an FAD payout ratio of 89.2%, providing a margin of safety. (Source: “Omega Announces Third Quarter 2017 Financial Results; Increased Dividend Rate for 21st Consecutive Quarter,” Omega Healthcare Investors Inc, October 30, 2017.)
Final Thoughts on OHI Stock
The U.S. stock market has been enjoying a bull market for more than eight years. With bloated stock prices, dividend yields have been subdued.
And that’s why Omega deserves investors’ attention right now. The drop in profits due to one of its operators will likely be temporary, but the investor concern associated with this issue has led to a sizable decline in OHI stock. And since dividend yield moves inversely to share price, Omega has become one of the highest-yielding REITs on the market.
Trading at $27.39 apiece, OHI stock offers an annual dividend yield of 9.5%.
As it stands, Omega could represent an opportunity for yield-seeking investors.