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:
Source: HCP NAREIT Presentation
An aging population is good news for HCP. 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 HCP’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 HCP 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, HCP has a high price standard deviation of 41%which negatively impacts its ranking.
HCP, Inc. (NYSE: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.
Disclosure: None
