The decade's surest megatrend pays a 5.3% dividend
The surest megatrend of the next two decades is the aging of the population. The baby-boom generation, the largest in history, is just entering the age when it begins to need senior housing and care, and this wave will grow regardless of the economic cycle, interest rates or politics. There are companies that are directly tied to this irreversible trend, and some of them also offer investors a generous, regular income. The company we will talk about is one of them, but right now it is undergoing the most interesting transformation in its thirty-year history.
Key points
It pays a dividend of around 5.3% and just increased it, even though its accounting profit at first glance fell sharply. The decline, however, is misleading.
It has just divorced the company that founded it 34 years ago, and by selling its portfolio for 560 million dollars it booked 542 million in net profit.
It is changing its model: from a mere landlord it is becoming also an operator of senior homes to capture the wave of population aging.
It is betting on private-pay senior housing, so it is less dependent on government reimbursements than most competitors in the sector.
Its tenants earn 1.62 times (seniors) to 2.66 times (skilled nursing) more than they pay in rent. Above-average healthy coverage.
That transformation has two faces. First, the company has just parted ways with its founder, that is, with the enterprise that brought it into the world decades ago and until recently was its largest tenant. This separation brought it a huge one-time gain and freed billions for new investments, but at the same time left traces in its statements that can confuse an inattentive investor. Second, the company is fundamentally changing the way it makes money: from a cautious landlord that merely collects rent, it is becoming also an active operator that wants to extract much more from the growing demand for care.
And right here lies both opportunity and risk. The market recently noticed that the company's reported profit fell, and punished its stock with a decline. However, if you look beneath the surface, you find that this profit drop is not a sign of weakness, but rather a byproduct of investments in future growth and one-time costs associated with a major transformation. In other words, the company looks weaker today than it actually is, and its generous dividend not only holds but is even growing.
The question for an investor is therefore not whether demand for senior care will grow. That is certain. It is whether this particular company can handle its riskier but more profitable transformation, whether the profit drop is truly only temporary, and whether today's compressed price and locked-in five-percent yield represent an opportunity.