Omega Healthcare Investors (NYSE: OHI) may have freaked some investors out when they saw its $0.18 per share dividend last month, which is half of what it paid in March and nearly a third of the dividend in January.[ad#Google Adsense 336×280-IA]Perhaps that’s why several Safety Net readers asked me to look at Omega’s dividend safety.
They may also have been alarmed at seeing Yahoo Finance list the stock’s dividend yield at 2% rather than 6%.
Fortunately, this can be easily explained.
The company traditionally pays its dividend in January, April, July and October.
And that payout typically goes higher.
But a funny thing happened early this year. After paying a $0.53 per share dividend in January, it paid only $0.36 in March and another $0.18 in April.
Here’s what happened:
Omega Healthcare Investors recently acquired Aviv REIT, another real estate investment trust (REIT) that invests in assisted-living facilities.
Due to the acquisition, the company issued a prorated $0.36 per share dividend a month early in March and another $0.18 per share in April. Combined, that equals a $0.01 per share raise from the previous quarter. It equals a 6% yield, not 2% as Yahoo Finance mistakenly reports.
Now that you know that Omega Healthcare Investors did not cut its dividend, let’s see if it’s safe.
Last year, Omega’s adjusted funds from operations (AFFO) – which is a measure of cash flow for REITs – was $2.85 per share. It paid out $2.02 per share in dividends for a payout ratio of 71%. I typically want to see a payout ratio based on cash flow of 75% or less.
In 2015, including the Aviv business, management expects AFFO to be between $2.98 and $3.04 per share. So it appears Omega can continue to raise the dividend as it has every year for the past five years.
And before the Great Recession – during which it kept its dividend flat for six quarters – Omega Healthcare Investors raised its dividend for another five years. It has raised the dividend 10 out of the past 12 years and 32 out of the past 46 quarters.
So it has an excellent track record of dividend increases – though it did cut and eliminate its dividend in the late 1990s/early 2000s.
With a solid dividend-paying history, growing cash flow and a low enough payout ratio, there’s nothing here that makes me worried at all.
Plus, if the Aviv acquisition is as strong as I think it could be, there may very well be more cash flow growth and bigger dividend hikes in the future.
Dividend Safety Rating: A
Source: Wealthy Retirement