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Realty Income: Another BORING and Solid Quarter for the Monthly Dividend Company

It was another solid quarter for Realty Income (O)—one of my very favorite long-term dividend machines.

Revenues jumped 22.6% on the back of new property investments and a 1.4% increase in same-store rents.  During the quarter, Realty Income raised $528 million in a secondary share offering and ploughed $405 million of it into new properties and development projects while managing to modestly increase its occupancy rate from 98.2% to 98.3%.  The new properties have a weighted average lease maturity of 10.6 years and a lease yield of 7.3%, meaning that these should be nice income generators for a long time to come.

Funds from operations (FFO)—the most common metric of profitability for REITs—increased 21.1% and 6.7% per share.  For the uninitiated,  FFO is a measure of net income that adds back non-cash charges like depreciation and backs out gains on the sale of properties.  The idea is to give a more accurate measure of real operating performance and of the cold, hard cash being generated for the payment of dividends.

And speaking of dividends, Realty Income increased its monthly dividend in June for the 76th time in its history and for the 67th consecutive quarter (see “5 Monthly Dividend Stocks”).  Since going public in 1994, Realty Income has churned out 527 dividend checks, making it one of the most dependable income payers to ever be traded publically.

This gets to the crux of why I love Realty Income and why I consider it far better than a bond for your retirement income needs.  Right now, Realty Income pays an annualized dividend of $2.19.  Ten years ago, it paid an annualized dividend of $1.22.  So, if you had retired in 2004, using your Realty Income dividends to pay your bills, you would have seen your income rise by fully 80%, far outpacing inflation.  And this says nothing at all about capital gains, which were substantial.

Had you instead purchased a 10-year bond, your income would not have changed; the coupon payment you received in 2014 would be the same as the first one you received in 2004.  And looking at current bond yields, your income would actually fall significantly if you were to reinvest the proceeds in today’s market.

Rather than think of Realty Income as a stock, I prefer to think of it as a perpetual bond with a rising, inflation-beating payout.  Yes, it is “riskier” than your average corporate bond in that its stock price is more prone to fluctuation than that of a bond.  As a case in point, O stock lost a third of its value during last year’s “taper tantrum.”

But if you’re buying it as an income generator, price fluctuations really don’t matter—so long as the business remains strong and the dividend remains intact.  And on that count, Realty Income passes the test with flying colors. Its portfolio is full of high-quality, recession-resistant properties; its “typical” property is a pharmacy run by Walgreens (WAG) or CVS Caremark (CVS).

Realty Income continued to pay and raise its dividend throughout the crisis years—and in my book, that qualifies O stock as a viable income substitute for bonds.

The question simply becomes one of price.  Realty Income currently yields 4.9%.  In a world in which the 10-year Treasury yields 2.5%, that’s attractive.  I would consider Realty Income a buy at a yield of 4.5% or higher.

If you are still years away from retirement, consider instructing your broker to automatically reinvest the monthly dividends.  I personally own shares, and that is exactly what I do.  I hope to leave these shares to my children decades from now, and if they are smart they will hold on to them and pass them on to their own children.

This post first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Blast from the Past: Walmart Dividend Letter from 1985

I was digging through an old file cabinet that had belonged to my grandfather, and I found this little blast from the past: a Walmart (WMT) letter to shareholders from 1985, signed by Chairman and company founder Sam Walton.

As a child in the 1980s, I actually remember my grandfather proudly showing me a paper certificate for his shares of Walmart stock, and I remember the day he went electronic by handing the paper certificates to the trust department at the bank.  He wasn’t sure he trusted the system and made sure to photocopy his certificates before handing them over…just in case.

Paper stock certificates seem so anachronistic today in this age of online trading and instant liquidity. It makes me wonder how different the world of trading and investment will be when my future grandchildren are going through a drawer of my personal effects.

1985 Walmart Dividend Letter

The truth is, I’m not sure how beneficial instant liquidity is in building long-term wealth.  In fact, it’s probably downright detrimental.  When my grandfather bought his shares of Walmart, the high cost of trading discouraged him from short-term trading.  As a result, he was a de facto long-term investor, which ended up working out to his benefit as Walmart grew into one of the largest and most successful companies in history.   Long after my grandfather passed away, the cash dividends from the Walmart stock he accumulated in his lifetime continued to pay for the retirement expenses of my grandmother–and for my college tuition!  Had my grandfather had access to the instant liquidity of today, he might have been tempted to sell far too early.

My grandfather also practiced his own version of Peter Lynch’s advice to invest in what you know long before Peter Lynch became a household name.  He was an Arkansas boy–born and raised not far from Fort Smith–and he liked to invest in local companies that he could observe firsthand.  Walmart was one of those local companies; its headquarters in Bentonville is less than an hour and half from Fort Smith by car.

I remember fondly my grandfather taking me to Fort Smith’s Walmart and buying me an Icee at the snack bar.  He liked to walk the aisles personally to see what Mr. Walton was doing with his money.  That might seem a little old fashioned today, but then, it’s still the approach taken by Warren Buffett and by plenty of long-term value investors.  If done right, it works.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Lorillard is a Bad Deal for Reynolds American Investors

And then there were two.  Two of the three remaining American “Big Tobacco” companies announced today that they would be merging: Reynolds American (RAI) will be buying Lorillard (LO) for $27.4 billion, including debt assumed.

Reynolds and Lorillard combined have sales of $13.3 billion and a market cap of $55.3 billion as of yesterday’s prices, leaving Altria (MO), the maker of Marlboro and other iconic brands in the number one spot.  Altria has annual revenues of $17.7 billion and sports a market cap of $84.5 billion.  Breaking it out by market share, the new Reynolds will control about 42% of the U.S. cigarette market, Altria will control about 51%, and smaller and foreign brands will make up the rest.

I’ll be brutally frank here: I question the value of this merger.  Reynolds is paying a high price for what is, we should remember, a business in terminal decline.  As of yesterday’s close, Lorillard shares traded for 21 times earnings and at a dividend yield of only 3.8%—quite low by the standards of a tobacco company.

Let me be clear on something: I’m not necessarily opposed to buying stocks in industries that are in terminal decline.  Under the right set of conditions—barriers to new competitors, dominant market position, minimal need for new capital investment, ample cash flows for dividends and buybacks, etc.—stocks with shrinking businesses can be excellent investments.

But the key here is price.  An investment in a shrinking company only makes sense if it is priced at a deep discount to the broader market.  And Lorillard—as implausible as this is—trades at a slight premium to the S&P 500.

Forgetting price for a moment, the Lorillard deal also brings with it regulatory risk.  85% of Lorillard’s sales come from its menthol brands, and these have become a lightning rod in recent years.  The U.S. Food and Drug Administration has already banned most flavored cigarettes and reported last year that it believes menthol cigarettes contribute to youth smoking.

Reynolds is effectively making a $27.4 billion bet that the FDA will leave menthol cigarettes alone.  That seems reckless to me; it’s a bet with modest upside and potentially disastrous downside.

Is there a trade to make here?

Yes: Sell Reynolds if you own it and move on.

I’m not the biggest fan of tobacco stocks at current prices.  I have shares of Altria and Philip Morris International (PM) that I have owned for years as part of a dividend reinvestment strategy, but I haven’t invested any significant new money in these positions in years because I see better income options elsewhere, such as in REITs.

If you feel you must own tobacco stocks, then I would go with Altria or Philip Morris International.  While neither are fantastic bargains these days, neither have the potential regulatory time bomb that Reynolds does in its exposure to menthol.  At time of writing, MO and PM sport dividend yields of 4.5% and 4.1%, in line with RAI’s 4.3%.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

 

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Long-Term Care as an Investment

LTC Properties, Inc. (LTC) is a real estate investment trust that invests primarily in the long-term care sector of the health care industry, including long-term care provider properties, skilled nursing properties, assisted living properties, independent living properties and memory care properties.  LTC also invests in first-lien mortgages secured by long-term care properties.

A little over 80% of LTC’s portfolio is invested in properties with the remainder in mortgages.  And among properties, skilled nursing is the biggest single segment, at 55%.  Assisted living comes in second at 37%.

LTC is backed by absolutely fantastic macro trends.  As the Baby Boomers age, there will be unprecedented demand for long-term services—and thus unprecedented demand for long-term care facilities.

But then, of course, there is Medicare.  It’s no secret that the U.S. government is short of funds these days, and Medicare cutbacks have been an unfortunate outcome. But that is what makes LTC such an attractive way to play the trend of Boomer aging.  LTC is a landlord, not a care provider, so Medicare cutbacks will have little impact on revenues.  And even better, as with Realty Income (O) and American Capital Realty Properties (ARCP)–two other popular monthly-pay dividend stocks–most of LTC’s properties are leased under triple-net leases, meaning the tenant covers taxes, insurance and maintenance.

LTC’s monthly dividend works out to a current yield of 5.2%, making it competitive with other medical REITs.  LTC is also a relatively small REIT with a market cap of just $1.37 billion.  I like that, as smaller REITs can generally grow their portfolios—and their dividends—at a faster rate than their lumbering large-cap cohorts.  And with a debt-to-equity ratio of only 46%, which is half the level of many of its peers, LTC has a lot of room to borrow. This too gives it flexibility to grow that its competitors do not have.

Action to take: Buy LTC Properties at market.  Plan to hold indefinitely for total returns of about 15% per year (I expect the S&P 500 to return no more than 5% annually over the next 5-7 years).  Use a 25% stop loss as risk management.

This post first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

 

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