Dividend Safety Analysis: Ventas
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Ventas has a Dividend Safety Score of 69, meaning the company’s dividend is very secure and reliable.
Starting with the payout ratio (3), it’s important to remember that REITs, because of the legal requirement to pay out 90% of taxable income as dividends, naturally have higher payout ratios. For example, while Ventas’ 82% FAD payout ratio may appear alarmingly high if it were a regular c-Corp, in a REIT this is actually a very safe payout ratio.
That’s especially true considering that the leases that underpin Ventas’ cash flow are usually very long-term (and with very strong counterparties), as long as 20 years in duration, providing exceptional cash flow predictability. The company’s total leases have a weighted average maturity of nine years. You can see that the company’s free cash flow payout ratio has remained between 70% and 80% for nearly a decade.
Source: Simply Safe Dividends
Combined with the large scale diversification of Ventas’ properties and asset types, as well as the high quality of its tenants, Ventas turns out to be one of the industry’s safest dividend payers. In fact, Ventas is widely considered a “Sleep Well At Night,” or SWAN stock (i.e. something safe for widows and orphans).
That’s partially because the industry in which it operates, mostly private payer funded long-term care, hospitals, and medical office buildings, is one of the most defensive (i.e. recession resistant) around.
This explains how Ventas was able to sail through the Great Recession without cutting its dividend, as well as its impressive long-term payout growth record. As seen below, the company has also been an outstanding free cash flow generator, which is unusual for capital-intensive, growth-focused REITs.
Source: Simply Safe Dividends
Of course, as I mentioned earlier, another reason that Ventas is a SWAN stock is its strong, balance sheet; which has only been getting stronger in recent years. Ventas maintains a BBB+ credit rating from S&P and a stable outlook.
Having a conservative amount of debt isn’t just about keeping down interest costs and being able to borrow cheaply to grow through acquisitions. It’s also important because a REIT’s revolving credit facility has certain debt covenants, or metrics, that need to be honored lest a REIT’s creditors be able to immediately call in its debts.
As you can see, not only is Ventas nowhere near breaching its covenants, but its financial strength has been improving in recent years as management has focused on using cheap equity to fund growth, and thus allowing its relative debt levels to continue to fall.
