Omega Healthcare Investors Inc: Is This 8.5% Yield Safe?
Should Income Investors Consider This High-Yield Stock?
To investors who want to live off the returns from their income portfolios, dividend safety is of utmost importance. That’s why companies with solid dividend growth track records have always been highly sought after.
The problem is, though, because of their popularity, well-known dividend growth stocks don’t offer much in terms of yield. Take the S&P 500 Dividend Aristocrats, for instance. The Dividend Aristocrats are a special group of S&P 500 companies with a minimum of 25 years of annual dividend increases. While their payouts are rock-solid, the average dividend yield of these companies stands at just 2.5% at the moment.
In fact, if you go over the list of companies that can be considered blue-chip names, you’ll see that very few of them pay out more than five percent.
In other words, if you want to find the true high-yield stocks, you would have to look at the lesser-known names trading in the stock market, such as Omega Healthcare Investors Inc (NYSE:OHI).
Omega Healthcare Investors may not be a familiar name to consumers, but the company is actually quite established in its business: real estate, particularly healthcare real estate.
The company’s portfolio consists of more than 900 operating healthcare facilities located in 41 U.S. states and in the U.K. Approximately 83% of those properties are skilled nursing/transitional care facilities. The remaining 17% are senior housing properties. OHI is currently the largest real estate investment trust (REIT) that focuses on skilled nursing facilities. (Source: “Supplemental Information Q2 2018,” Omega Healthcare Investors Inc, last accessed August 7, 2018.)
Note that Omega Healthcare Investors does not actually operate these properties. Instead, the company leases them to healthcare operators. That means the operators (tenants), rather than OHI, are responsible for paying the property-level expenses, such as labor, insurance, property taxes, and capital expenditures.
OHI Stock Has a Generous Dividend Policy
And since tenants have to pay rent on a regular basis, Omega Healthcare Investors Inc collects a predictable stream of rental income. In turn, the company passes some of that income to shareholders through dividends.
Right now, OHI stock has a quarterly dividend rate of $0.66 per share, which comes out to an annual yield of 8.5%.
Does the company make enough money to cover the payout?
Well, Omega Healthcare Investors just recently reported earnings. Since the company is structured as a REIT, a key performance metric to check out is adjusted funds from operations (AFFO).
Excluding special items, OHI generated AFFO of $159.1 million—or $0.76 per share—in the second quarter of 2018. The amount was more than sufficient to cover its quarterly dividend rate of $0.66 per share. (Source: “Omega Announces Second Quarter 2018 Financial Results,” Omega Healthcare Investors Inc, August 3, 2018.)
In the first half of this year, Omega Healthcare Investors’ AFFO totaled $1.54 per share. Since the company declared total dividends of $1.32 per share during this period, it had a payout ratio of 85.7%.
Going forward, management expects OHI to earn AFFO of between $3.03 and $3.06 per share for full-year 2018. If the company manages to achieve this target, it should have no problem covering its expected dividend payments of $2.64 per share for the entire year.
Omega Healthcare Investors Inc: Beyond the Numbers
Based on the numbers we just looked at, Omega Healthcare Investors’ payout looks quite safe.
However, there are more things to consider than just the numbers. For instance, one of the company’s major operators—Orianna Health Systems—hasn’t been paying its rent. And that has caused OHI to earn less rental income than what it could have.
The good news is, the company has made solid progress alleviating the problem. In the past two months, OHI transitioned 14 Orianna facilities to existing operators with annual contractual rent of $12.5 million. Going forward, investors should pay close attention to how the company resolves the remaining Orianna portfolio issues.
Another factor to take into account is demographics.
Around 10,000 baby boomers turn 65 every day. The U.S. Census Bureau projected that between 2012 and 2015, the population aged 65 and over would almost double from 43.1 million to 83.7 million. (Source: “An Aging Nation: The Older Population in the United States,” U.S. Census Bureau, last accessed August 7, 2018.)
The demand for healthcare tends to increase as the population grows older. Owning the largest portfolio of skilled nursing facilities of any REIT, Omega Healthcare Investors is well positioned to capitalize on this demographic trend.
Don’t forget, despite the situation at its Orianna facilities, OHI still gets investment-grade ratings. The company’s senior unsecured notes are rated BBB- by S&P Global Ratings and Fitch Ratings, and Baa3 by Moody’s Corporation. Maintaining an investment-grade rating is critical because it provides flexibility in case the company needs to issue debt.
Bottom Line on Omega Healthcare Investors Inc
Over the past year, the stock market seemed to have a hard time putting a price tag on this healthcare REIT. The OHI stock price dipped below $25.00 at one point. But most recently, it has been making a strong comeback and now trades at around $31.00 per share.
Still, the company’s dividend policy remains attractive. And because Omega Healthcare Investors does not seem to have any problem covering its payout, its 8.5% yield could be an opportunity.