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Why Omega Healthcare REIT Is Blue-Chip Dividend Stock

Why Omega Healthcare REIT Is Blue-Chip Dividend Stock

By Monday, 29 July 2019 12:20 PM Current | Bio | Archive

In the world of investing, “blue chip” stocks are those that generally have a long history of safe and established dividends.

These stocks tend to be larger companies in terms of revenue and market capitalization which are a great starting point for those looking to buy a high-quality dividend stock. We define blue chip stocks as those that belong to at least one of the following groups: Dividend Achievers, Dividend Aristocrats, or Dividend Kings.

Omega Healthcare Investors (OHI) is a Dividend Achiever with a very high dividend yield above 7%. Shares of Omega are up just 5% this year, excluding dividends, while the S&P 500 has risen more than 20%, and is very close to its all-time highs.

In our view, this presents an opportunity for income investors as Omega continues to pay an outstanding dividend yield that is more than three times that of the 10-Year US Treasury rate. This makes Omega stock a high-yield blue chip stock for income investors.

MedEquities Is The Next Leg Of Growth

Omega is a healthcare REIT that generates the vast majority of its revenue from skilled nursing facilities, while a small proportion is derived from senior housing developments. Thus, it is well-positioned to capitalize on the increasing population of Baby Boomers that retire each day in the US, many of which require long-term care. It was founded in 1992 and has a market capitalization of about $8 billion.

Success and growth in the REIT industry is all about scale, and to that end, Omega recently acquired MedEquities, a REIT that invests in healthcare properties and healthcare-related debt instruments. MedEquities focuses on acute, post-acute, and behavioral healthcare.

The May 2019 transaction, which was valued at about $600 million, provides meaningful benefits for Omega. Management believes it will add ~$0.05 to annual funds-from-operations, or FFO, while also providing Omega with nine new operators, diversifying its operator base. In addition, there are expected to be significant synergies once the acquisition is fully integrated, which should help boost margins over time for Omega.

We estimate Omega can grow at 4.5% without MedEquities, and its growth rate should improve further based upon closing the transaction due to additional scale and margin improvement.

The trust’s most recent quarter showed a fractional revenue increase year-over-year, coming in at $224 million in Q1. Omega saw two of its tenants move into bankruptcy recently, and management referred to its operating environment as “challenging” in the press release. However, the trust is combatting this with reducing operating expenses, including small workforce reductions.

FFO came in at $0.67 per share thanks to slightly lower earnings on a dollar basis, as well as a higher share count year-over-year. We see Omega earning $3.06 in FFO-per-share this year, which would be roughly congruent with what it earned last year thanks to these headwinds. In addition, this estimate excludes the impact of MedEquities.

High Dividend Yield Remains A Significant Draw

Omega pays a current dividend of $0.66 cents per quarter, or $2.64 annually. On the current share price under $37, Omega’s yield is a very impressive 7.2%. REITs are generally known for high yields, and Omega certainly doesn’t disappoint income investors.

The distribution represents just over 80% of projected FFO this year, which is normal for REITs. REITs generally pay out nearly all of their earnings, so Omega’s payout ratio will remain high. However, we see the payout as safe today given Omega’s Dividend Achiever status, and its growth outlook.

With the Omega’s growth outlook improved by MedEquities, and the yield in excess of 7%, we like Omega as an income stock with a bright future. Despite near-term headwinds, we see the industry Omega competes in as favorable long-term, and rate the stock a buy for income investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.


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Omega Healthcare (OHI) is a Dividend Achiever with a very high dividend yield above 7%. Shares of Omega are up just 5% this year, excluding dividends, while the S&P 500 has risen more than 20%, and is very close to its all-time highs.
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Monday, 29 July 2019 12:20 PM
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