With a huge demographic tidal wave upon us – one which has been called a silver tsunami – you would think that Ventas (NYSE: VTR) shareholders would have nothing to worry about when it comes to getting paid their dividends. After all, 10,000 people per day are turning 65 in the United States. And we know that as we get older, we need more healthcare.
Ventas has a portfolio of more than 1,300 senior housing and healthcare facilities in the U.S., U.K. and Canada. Ventas is a real estate investment trust (REIT) with an attractive 5.5% yield.
But is it safe?[ad#Google Adsense 336×280-IA]Ventas has raised its dividend for each of the past five years, boosting it by a compound annual growth rate of 7.7% per year.
It hasn’t cut its dividend in over 10 years.
The last one occurred in 2002.
While I love a good track record of stable and rising dividends, I have to make sure the fundamentals can support the dividend, otherwise yellow or red flags come up.
When that happens, we can get out of a stock way before the dividend is cut.
Funds from operations (FFO), which is a measure of cash flow used by REITs, is projected to grow 6.5% this year, but slow down to a growth rate of 1.3% next year.
In 2014, Ventas’ FFO per share was $4.29. It paid out $2.97 per share in dividends for a payout ratio of 69%. The payout ratio is the percentage of cash flow that is paid out in dividends. Most of Wall Street uses earnings instead of cash flow for the payout ratio figure, but cash flow is a more accurate barometer because dividends are paid with cash, not earnings.
There is a difference.
Earnings contain all kinds of noncash items, like stock-based compensation and depreciation, which have no bearing on the amount of cash that is generated by the company’s operations.
Generally speaking, I like to see a payout ratio of 75% or less. That gives me confidence that the dividend will be sustained even if the company has a rough year or two where cash flow declines.
So Ventas’ 69% is perfectly acceptable.
And FFO is expected to increase in 2015 and 2016. Next year’s estimate for growth is low, so it may be worth taking another look at the company in 2016 to see if the payout ratio is creeping up to our comfort zone.
If it does, the stock will likely get downgraded a notch.
But in the meantime, no worries about the payout ratio.
Ventas also has a track record of FFO growth, up more than 20% over the past three years.
So with a solid history of both dividend and FFO growth, expected growth to continue for at least the next year and a half and a low payout ratio, I see little to be concerned about when it comes to Ventas’ dividend.
And the fact that its properties cater to a swelling population should only add to its growth prospects.
Dividend Safety Rating: A
Hoping your longs go up and your shorts go down,
Source: Wealthy Retirement