STORE Capital Corp: A Top Real Estate Stock for Dividend Income
Why STOR Stock Is a Top Pick for 2019 and Beyond
For more than a year, I’ve been pounding the table about STORE Capital Corp (NYSE:STOR).
For example, in September 2017, I wrote that, as STOR stock trended up, “Value-seeking income investors interested in this dividend stock may want to act quickly.”
I hope you followed my advice. Since that article was published, STORE Capital’s stock price has increased by more than 25%. The company has also raised its cash dividend payment to shareholders.
But to be honest, being bullish on STORE Capital was not a difficult call at that time. In June of last year, the company announced that it received a $377.0 million investment from Warrant Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). (Source: “STORE Capital Announces Investment from Berkshire Hathaway,” STORE Capital Corp, June 26, 2017.)
Buffett is one of the most successful investors in our time, and he also happens to be a fan of dividends. If you take a look at Berkshire’s latest 13-F filing to the Securities and Exchange Commission, you’d see that all 10 of the firm’s top 10 holdings by value are dividend-paying companies. (Source: “Form 13F Information Table,” Securities and Exchange Commission, last accessed December 7, 2018.)
And since we are looking at the 13F filing, it’s worth checking whether the “Oracle of Omaha” still holds STORE Capital stock.
He does. The filing shows that Berkshire owned 18.6 million shares of STOR stock as of September 30. In fact, Buffett hasn’t sold any shares of STORE Capital since his company made the investment.
Now, keep in mind that Berkshire acquired those 18.6 million shares through a private placement at a price of $20.25 per share. Given that the stock currently trades at $30.68 apiece, Buffett has already made a hefty profit from that investment.
The big question now is whether STORE Capital Corp is still worth considering for today’s income investors.
I believe the answer is “yes.”
STORE Capital Corp
STORE Capital is a net lease real estate investment trust (REIT) headquartered in Scottsdale, Arizona.
If you’ve been following this column, you’d know that I’m a big fan of net lease REITs. Under a net lease agreement, the tenant, rather than the landlord, is responsible for paying property-related expenses such as property tax and insurance. Therefore, net lease REITs—which are essentially landlords—can keep more of their rental income, which can then be returned to shareholders through dividends.
As of September 30, STORE Capital’s portfolio consisted of 2,206 properties located in 49 U.S. states. They are leased to more than 400 tenants from over 100 different industries. (Source: “Value Added By Design,” STORE Capital Corp, last accessed December 7, 2018.)
In other words, the company’s portfolio is diversified not just geographically, but also across industries.
The operating metrics look pretty good, too. At the end of the third quarter, 99.7% of STORE Capital’s portfolio was leased with a weighted average remaining lease contract term of around 14 years. Therefore, the company is well positioned to generate recurring cash flows.
Mind you, those cash flows will likely also increase over time. This is because, at STORE Capital’s properties, the lease agreements often come with embedded rent escalators. The average annual rent increase is 1.8% across the portfolio.
Lock in a Growing Dividend Stream
With a stable business and an increasing rental income stream, STOR stock is set to pay increasing dividends.
And that’s exactly what the company has been doing. Since STORE Capital Corp went public in November 2014, its quarterly dividend rate has grown by 32%. (Source: “Dividends,” STORE Capital Corp, last accessed December 7, 2018.)
Furthermore, the company has no problem covering its growing payout. In its most recent quarter, STORE Capital generated adjusted funds from operations of $97.4 million, or $0.47 per diluted share. Considering that the company declared a quarterly cash dividend of $0.33 per share during the quarter, its payout ratio came out to just 70.2%, leaving a wide margin of safety. (Source: “STORE Capital Announces Third Quarter 2018 Operating Results,” STORE Capital Corp, November 1, 2018.)
At its current share price, STORE Capital offers an annual dividend yield of 4.3%.
Given the nature of its business, STOR stock probably won’t shoot through the roof anytime soon. However, based on its solid operating metrics and financial performance, I’m confident that the company will be paying increasing dividends for years to come.
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