As we’ve noted on multiple occasions, real estate investment trusts (REITs) offer some of the best dividend yields around. But we’ve also cautioned against rushing headlong into the sector. Extensive research must always precede building a position in a REIT. Why? Because this is one of the riskiest sectors to invest in. More on that in a bit, though. Now let us introduce out pick for today’s analysis: Welltower Inc (NYSE: HCN).
History and business overview of Welltower
Welltower is a REIT focused on health care infrastructure. Its property portfolio covers senior housing, post-acute care, and medical outpatient facilities.
The company began in 1970 under the name Health Care Fund. Bruce Thompson and Fritz Wolfe founded the business in Lima, Ohio, with two skilled nursing facilities. In the mid-1980s, it incorporated as Health Care REIT and relocated its headquarters to Toledo, Ohio. At that time, Welltower has all of 12 employees.
In 1998, the company acquired its first properties outside the US. It entered the Canadian and UK markets in 2012 with the acquisitions of Chartwell and Sunrise Senior Living.
The Welltower name was adopted in 2015. The company currently has a market cap of $26.5 billion.
Welltower has been paying quarterly dividends since 1971, never missing a distribution. The annual payout has been rising every year since 2010.
Late in April, the company announced that its board has approved a second-quarter dividend of $0.87 per share. This adds up to an annualized payment of $3.48, up from $3.44 in 2016. The current yield is 4.8%.
Why REITs carry risk
Income investors like REITs because of the generous dividend yields. These yields have largely to do with the fact that a REIT structure comes with the obligation to distribute at least 90% of taxable income through dividends.
Those looking to add a REIT to their portfolio should always remember that the sector is vulnerable to interest rate increases and economic cycles.
Since REITs use most of their cash to cover dividend payments, they have to raise investment capital elsewhere. REITs secure funds by borrowing and equity offerings. But when interest rates start climbing, the cost of funding follows suit.
Things to like about Welltower
Demographic trends are the strongest tailwind for Welltower. It’s estimated that the number of Americans aged 75 and above will double within 20 years. As the population gets older and health awareness rises, healthcare spending is expected to grow steadily in the years ahead.
Another advantage Welltower enjoys is the predominance of private-pay sources. They account for 93% of the company’s revenue from properties. As a result, Welltower is relatively immune to the uncertainty that comes from doing business with healthcare services that rely on government reimbursement programs.
While Welltower is definitely worth consideration, its stock is anything but a bargain right now. The shares have traded in the range of $59.39 to $80.19 over the past year. At the time of writing, they are trading at 72.97.
Welltower has a trailing P/E ratio of 22.5 against an industry average of 24.6, as per data from Morningstar. The forward value is quite off-putting: 36.4 compared to an average of 19.9 for the S&P 500 index. However, some investors may be OK with these numbers considering that the five-year average for the company is in the triple digits. They may also take heart from the fact that Welltower sports a P/B ratio of 1.9 compared to 2 on average for its industry and 3 for S&P 500. Its debt/equity multiple is also better: 0.8 versus an industry average of 1.
I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.
This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.