Company Description: Health Care Property Investors, Inc. is a California based equity-oriented real estate investment trust that has direct or joint venture investments in health care-related facilities across the U.S.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
HCP is trading at a discount to only 1.) above. When also considering the NPV MMA Differential, the stock is trading at a 36.0% discount to its calculated fair value of $56.11. HCP earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
HCP earned one Star in this section for 3.) above. HCP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1985 and has increased its dividend payments for 31 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
HCP earned a Star in this section for its NPV MMA Diff. of the $2,172. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as HCP has. The stock's current yield of 6.4% exceeds the 2.01% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Health Care REIT, Inc. (HCN) with a 5.0% yield, Omega Healthcare Investors Inc. (OHI) with a 7.2% yield and National Health Investors Inc. (NHI) with a 4.8% yield.
Conclusion: HCP earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks HCP as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $70.64 before HCP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 31 years of consecutive dividend increases. At that price the stock would yield 3.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is -6.2%. This dividend growth rate is lower than the 1.8% used in this analysis, thus providing a margin of safety. HCP has a risk rating of 2.00 which classifies it as a Low risk stock.
HCP is a real estate investment trust (REIT) with a diversified portfolio of health care-related properties. In the long run, HCP should benefit from increased healthcare spending and an aging population. In addition, the company has the potential to continue growth through strategic acquisitions, tie-ups and other investments, in spite of intense competition within the industry. The company announced a proposed spin off of 320 properties making up HCP ManorCare into a separate publicly-traded company. The remaining 860 properties covering senior housing, life sciences and hospitals will remain with HCP, Inc.
The company's debt to total capital of 54% (flat from the previous review) is above my maximum of 45%. Its free cash flow payout of 153% (-230% in the last review) improved slightly but continues to be outside my desired level and is high even for a REIT considering they are required to payout 90% of their earnings as a dividends. The stock is currently trading at a 38.3% discount to my calculated fair value of $55.41. I plan to keep an eye on the free cash flow payout going forward.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in HCP (2.1% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: HCP, HCN, OHI, NHI,