Dividend Aristocrats Part 34: HCP, Inc. (HCP) by Ben Reynolds, Sure Dividend

HCP (HCP) is one of a kind. It is the only REIT that is also a Dividend Aristocrat.

As a REIT, HCP must pay out at least 90% of its income to shareholders. The fact that HCP has increased its dividend payments for 30 consecutive years shows while paying out 90%+ of its profits to shareholders shows the tremendous stability the company’s operations possess.

HCP

Source: REITWorld Conference Presentation, slide 9

There are 3 large players in the health care REIT industry. Each is shown below, along with market cap:

  • Welltower (HCN) has a $22.5 billion market cap
  • Ventas (VTR) has a $18.1 billion market cap
  • HCP (HCP) has a $16.7 billion market cap

In addition to HCP’s long dividend history, the company also has a high dividend yield of 6.3% – the highest of any Dividend Aristocrat. Click here to see 12 quality high dividend stocks.

HCP Business Overview

HCP operates a portfolio of more than 1,000 properties in the United States and British Isles.

The company operates in 5 segments within the health care industry. Each segment is shown below along with the percentage of projected total net operating income generated for the company in 2015

  • Senior Housing is projected to generate 37% of total net operating income
  • Post-Acute/Skilled Nursing is projected to generate 29% of total net operating income
  • Life Science is projected to generate 15% of total net operating income
  • Medical Office is projected to generate 14% of total net operating income
  • Hospital is projected to generate 9% of total net operating income

Competitive Advantage

HCP’s competitive advantage comes from its diverse portfolio of health care properties and its size.

The company’s portfolio of over 1,000 health care properties minimizes the risk that any one deal possess. Smaller REITs are less diversified, and more subject to risks from individual deals.

HCP’s diversified portfolio is responsible for its 30 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 control.

HCP generally 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

Source: REITWorld Conference Presentation, slide 6

The health care industry is an especially profitable area in which to invest.  HCP is the only REIT Dividend Aristocrat because it focuses its operations on the stable health care industry.

Total Return Analysis

Despite its presence in the health care industry, HCP has seen lackluster dividend growth over the last decade of 3.2% a year.

The company’s FFO (funds from operations) per share have grown faster – at 5.3% a year over the last decade. This means HCP has slowly reduced its payout ratio over the last decade. FFO-per-share growth is the better metric to use to measure true per-share growth at HCP.

Over the next several years, HCP is likely to increase its dividend payout ratio.  The company has substantial room to increase its dividend payments faster than overall company growth for several years.

While HCP’s growth might not be as impressive as many other Dividend Aristocrats, the company’s high dividend yield gives investors solid total return potential.

HCP has favorable long-term growth drivers…

The 65+ population in the United States (and British Isles) will continue to grow due to health care advances and the retiring ‘baby boomer’ generation. The result of this is an older average age in the United States than has ever been seen.

The image below shows the trend toward old age in the United States:

HCP

Source:  NAREIT Presentation

An aging population is good news for the firm.  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 fuel the firm’s growth for years to come.

I expect HCP to continue growing its FFO-per-share at between 5% and 6% a year over the long run. This growth combined with the company’s current 6%+ dividend yield gives investors in HCP expected returns of between 11% and 12% a year going forward.

Recession Performance

The Great Recession was a difficult time for the real estate industry in general. HCP was the exception – the company performed well throughout the Great Recession.

The reason the firm performed well is due to its presence in the stable health care industry. When recessions hit, people still need health care. As a result, HCP’s tenants were able to (in general) pay their rents/leases uninterrupted.

HCP’s FFO-per-share through the Great Recession and subsequent recovery is shown below to illustrate how little the company was affected by the recession.

  • 2007 FFO-per-share of $2.14 (high at the time)
  • 2008 FFO-per-share of $2.25 (new high)
  • 2009 FFO-per-share of $2.14 (recession low)
  • 2010 FFO-per-share of $2.18 (beginning of recovery)
  • 2011 FFO-per-share 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 over 6% 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 servicing the health care industry, the firm has a high price standard deviation of 41%which negatively impacts its ranking.

HCP makes a compelling choice for investors in need of current income combined with greater-than-inflation growth over the next several years who can handle the stock’s higher than average volatility.