What HCP, Inc. (HCP)’s Upcoming Spin Off Means For Dividend Investors

Conclusion

While in the long-run HCP’s spin off of Quality Care Properties will likely make it more profitable and increase its cash flow security, the short-term effects on dividend investors could be painful. I’m not interested in adding HCP to our Conservative Retirees dividend portfolio for these reasons.

With such high uncertainty regarding HCP’s future management, its ongoing turnaround efforts, and the likely large cut that is coming to its dividend, I can’t recommend this troubled medical REIT. Especially not when REITs such as Welltower and Ventas are far higher quality, and soon to be higher-yielding, choices at this time.

QCP could see a good deal of selling pressure when the spinoff completes, which isn’t unusual for unwanted business units. Even if the combined dividends from QCP and the “new” HCP equal HCP’s current dividend, owning a business like QCP is too risky for me. I’ll stick to some of my favorite blue-chip dividend stocks here.

From a Dividend Safety Score perspective, it’s a tough judgment call on how to handle these unique situations. Yes, HCP’s headline dividend figure will be cut, but in reality part or all of it is being “converted” into shares of QCP instead. We don’t yet know QCP’s payout plans (total dividends could remain unchanged or even slightly increase), but it is clearly a riskier business.

No one knows how the market might respond if there is a moderate reduction (e.g. 10-15%) in total dividends paid by HCP and QCP combined. In the long run, I don’t think it will matter. However, current HCP investors, especially those using dividends to supplement their retirement income, must decide if they want to wait around through the transition or move on to other investments with more certain dividend payouts.

Disclosure: None

Additional Links:

(1) https://www.justice.gov/opa/pr/government-sues-skilled-nursing-chain-hcr-manorcare-allegedly-providing-medically-unnecessary

(2) http://www.fool.com/investing/2016/09/09/hcp-incs-biggest-win-in-2016-so-far.aspx

(3) http://ir.hcpi.com/2016-10-13-HCP-Board-of-Directors-Approves-Spin-Off-of-Quality-Care-Properties-Inc