Welltower: Dividend Income Producing Machine

  • Growing demand for healthcare services due to environmental changes, growing number of diseases and changes in lifestyles are increasing the growth opportunities for companies like Welltower (NYSE:HCN) that invests primarily in senior living and health care properties.
  • Total US population is projected to grow by 9% in the next eight years; however, only the elderly population is projected to increase by 40% by 2024.
  • Cautious management and ample growth opportunities make Welltower’s income producing machine for long-term income seeking investors and the current attractive valuation is a good entry point to get into.

Growing demand for healthcare services due to environmental changes, growing number of diseases and changes in lifestyles, are increasing the growth opportunities for companies like Welltower that invests primarily in senior living and health care properties. Growth opportunities in seniors living segment are very high due to low fertility rates and increasing life expectancy. As we mentioned earlier, the total US population will increase by 9% by 2024, however, only the elderly population is expected to grow 40% by that same year. These growth opportunities made Welltower and its peers few of the most sought-after investment opportunities trading at more than two times the valuation of S&P 500 but the good news is Welltower is trading below industry averages by a significant margin.

Welltower, as an independent equity real estate investment trust, engages in acquiring, developing, planning, managing, monetizing and re-positioning of real estate assets that serve healthcare industry. The company’s seniors housing operating segment contributed 56% of total revenues for the year 2015. Based in Toledo, Ohio, Welltower was founded in 1970.

The company prefers to grow its real estate portfolio through acquisitions rather than heavily investing in development. On 2 August 2016, Welltower agreed to acquire $1.15 billion worth of properties operated by Vintage Senior Living. Welltower’s real estate portfolio is highly diversified with exposure not exceeding 10% of net operating income to any region, this ensures high stability in earnings.

Cost of debt declined considerably from 4.75% in the second quarter of 2015 to 4.33% during the same quarter of 2016, this is a positive for stock price appreciation as it creates more enthusiasm among investors.

Aged population (60 and above) grew from 17.4% to 19.5% of the total US population in the five year period ended in 2014. At the same time, income of the aged population also grew compared to their younger peers making Welltower a compelling long-term investment opportunity for income seeking investors.

The company’s stock price grew by 11.5% in the past year. In addition to the attractive dividend income, risks for dividend income and stock price deterioration should come from management’s inability to direct the company in the right direction rather than to seek growth opportunities. Because of abundant growth opportunities due to fast growing old population the future looks bright for companies like Welltower, but it all depends on the management’s skills to execute and deliver the results.

Compared to its peers Ventas (NYSE:VTR) and HCP (NYSE:HCP), Welltower is operating with high profitability with Return on Assets of 2.55% compared with Ventas’s 1.94% and HCP’s -0.30%. Further, the company’s financial leverage is also very low with debt to equity of 0.90 times compared to its competitors Ventas’s 1.12 times and HCP’s 1.16 times.

Welltower pays a quarterly dividend of $0.86 yielding 4.46% and the stock is trading at attractive earnings multiple of 41.5 times compared to industry average of 47.1 times earnings. Cautious management and ample growth opportunities make Welltower income producing machine for long-term income seeking investors and the current attractive valuation is a good entry point to get into.

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