Welltower Inc (HCN): A High-Yield Medical REIT Blue Chip

Valuation

Due to the way REITs are structured for tax purposes, the P/E ratio is less useful. This is due to depreciation and amortization expenses lowering earnings when in reality properties generally appreciate over time.

Thus P/AFFO, or adjusted funds from operations (aka FAD), is a more useful valuation metric since it compares the price to the REIT’s free cash flow.

In this case, Welltower Inc (NYSE:HCN) is trading at a P/AFFO of 17.4, a slight discount to its historical 18.1. The current 5.0% dividend yield is somewhat higher than the stock’s five-year average yield of 4.8%, too.

From a quick glance, Welltower’s current trading multiples look reasonable relative to the company’s history. Going forward, Welltower will likely continue delivering low- to mid-single digit cash flow growth, which is also in line with management’s FAD growth guidance for 2016.

Should this pace of growth continue, Welltower could be expected to deliver annual total returns of 8-10% (5% dividend yield plus 3-5% annual earnings growth) over the long term.

Conclusion

When it comes to blue chip medical REITs, Welltower has to be near the top of the list. With a nearly 50-year track record of creating value for shareholders, a conservative management, steadily rising dividends, and a highly recession-resistant business model (see seven other recession-resistant businesses here), Welltower deserves consideration to be a core holding in every diversified dividend portfolio.

We currently hold Omega Healthcare (OHI), which offers a yield north of 7%, in our Conservative Retirees dividend portfolio. Investors can read our analysis of Omega Healthcare here.

Disclosure: None