Ventas, Inc. (VTR): A High-Yield, High Quality Healthcare REIT

Valuation

When it comes to valuations, P/E ratios aren’t the best metric to use for REITs because GAAP earnings include depreciation and amortization. These are non-cash charges that don’t affect a REIT’s ability to pay its dividend, especially since properly maintained properties tend to appreciate in value over time.

This is why the two best valuation methods are yield, specifically compared to a REIT’s historical yield, and price to AFFO, or adjusted funds from operations, which Ventas calls FAD. Remember that AFFO is what ultimately sustains and supports dividend security and growth over time and is the equivalent of a REIT’s free cash flow.

As you can see from the above table, the recent sell-off in REITs, and Ventas in particular, has brought its shares down to somewhat historically undervalued levels. While it may not be a screaming buy yet, at least from a P/AFFO perspective, the generous yield of 4.8%, when combined with the likely 5% to 6% long-term dividend growth, has potential to generate solid annual total returns near 10% over time.

However, don’t forget that Ventas, like many REITs, is far less volatile than the market in general with a beta of just 0.18, which means that its potential risk adjusted total returns are even more impressive. It’s hard to say what impact rising rates could continue to have on REITs over the short term, but long-term dividend investors could see some attractive opportunities soon.

Conclusion

Thanks to the recent REIT correction, Ventas is now selling at a historically undervalued price that makes this high-yield, blue chip SWAN stock a potentially appealing option for many long-term dividend portfolios.

With a growth runway that could stretch decades into the future, one of the best management teams in the industry, and a strong balance sheet that supports its generous, yet highly secure payout, Ventas appears to be a solid REIT for long-term dividend growth investors looking for some healthcare exposure. However, be aware that Donald Trump’s presidency seems likely to bring major changes to the healthcare value chain, impacting many different dividend stocks in potentially unpredictable ways.

Disclosure: None

Additional Links:

(1) http://www.simplysafedividends.com/portfolios/conservative-retirees/

(2) http://www.simplysafedividends.com/hcp-dividend-cut-quality-care-qcp-spin-off/

(3) http://www.simplysafedividends.com/dividend-payout-ratio-how-to-calculate-and-apply-it/