A 5.4% Dividend Yield With the Best Coverage in a Decade
The aging of the population is one of the few truly certain trends we face in the next two decades. The number of seniors in the Western world will grow regardless of how the economy performs, what interest rates look like, or who wins elections. And with it, the need for care that these people will require will also grow. There are companies that are directly connected to this irreversible trend, and one of them is offering investors a generous, regular income today.
Key points
It pays a dividend of around 5.4% annually and has held it unchanged since 2020, even though it did not cancel it during the pandemic, when entire sectors were collapsing.
Its tenants today earn 1.58 times more than the rent they pay, which is the highest level in more than a decade.
A price-to-earnings ratio of 36 looks expensive, but for this type of company, that number is misleading. The real valuation is about half that.
The company leases its buildings to nursing home operators, whose demand is driven by demographics: thousands of new seniors are added every day in the US.
Management has repeatedly indicated that a dividend increase is coming after six years, because earnings now cover the payout with plenty of headroom.
This company owns hundreds of senior care and skilled nursing facilities and rents them out to operators who take care of the patients. So it doesn’t treat anyone itself, it just collects rent from buildings for which demand will increase year after year thanks to demographics. The model sounds simple and safe, and to a large extent it is. However, as with everything in investing, the devil is in the details.
That detail is the tenants. Nursing home operators largely depend on how much the government pays them for care through health programs. When the government pays generously, tenants thrive and reliably pay rent. When it starts to cut, they get into trouble, and some may even go bankrupt, as recently happened to one of the company’s largest tenants. The tension between the certainty of the demographic trend and the uncertainty of government reimbursements is at the heart of the whole story.
And that is precisely why the question is more interesting for an investor than it first appears. Not whether demand for care will grow – that is certain. But whether the company’s tenants are strong enough to benefit from that growing market and pay reliably, and whether today’s stock price is reasonable for that combination of high yield and demographic tailwind. We discuss the specific valuation, target prices, and scenarios in the paid section.
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