Saturday, July 18, 2015

W.P.Carey (WPC) Looks Cheap Enough To Purchase

I’m getting July started off right, with the purchase of shares in a high-quality company that has a penchant for rewarding shareholders (the owners of the company) with large and growing dividends. They saysnowballs don’t roll in July. I beg to differ!
This past weekend saw July 4th, or Independence Day.
First, thank you to everyone who serves in the military and allows us the freedom we enjoy.
Second, when I think of Independence Day, I also think of a different kind of independence – independence from the rat race, wage slavery, and the constant need to exchange our limited and dwindling time for a paycheck.
And I just bought a little more independence with this most recent transaction.
I purchased 25 shares of W.P. Carey Inc. (WPC) on 7/6/15 for $59.53 per share.

Overview

W.P. Carey Inc. is a global real estate investment trust that provides services including long-term sale-leaseback and build-to-suit financing solutions.
As of December 31, 2014, the company has 219 tenants across 783 properties in 18 countries. The occupancy rate is 98.6% and the average lease term is 9.1 years.
They operate in two segments: Real Estate Ownership (71% of fiscal year 2014 revenue) and Investment Management (29%).
They were founded in 1973 but reorganized as a REIT in 2012.

Stick To The Plan

I’ve talked a lot about WPC lately, so there’s not much more I can add. I initiated a stake in the company (and analyzed the stock) back in early April and the stock has dropped incrementally since then. What does a long-term dividend growth investor do? Well, buy more, of course. I last averaged down in early June, but this is my most aggressive purchase thus far.
What I will quickly discuss, though, is sticking to your long-term plan.
I’ve been hearing a lot of noise about Greece lately. I have high-grade earplugs, but even I have a hard time ignoring the noise when the media is screaming in my ear. And that’s kind of what’s happening here with the situation in Greece.
I can tell you what’s not going to happen: Greece isn’t going anywhere. Whether or not they’re part of the eurozone in a decade is anyone’s guess, but the people and the country aren’t going anywhere. Besides, this is an economy that’s smaller than the metro Boston area. Are we really going crazy over something like that?
I can, however, tell you what is going to happen: Great companies will continue to sell more products and/or services to more people in the future. Profits will grow. And dividends will increase in turn. PepsiCo, Inc. (PEP) will still be selling potato chips and beverages in a decade. Aflac Incorporated (AFL) will still be selling insurance products to clients in the US and Japan over the foreseeable future. And W.P. Carey Inc’s properties across the world will still be used for a variety of purposes tomorrow, a year from now, and a decade from now.
The odds of any of these companies not continuing to do what they do best and make a lot of money doing it are incredibly small. And it would certainly take a lot more than some currency concerns in Greece to make that happen. I just can’t recall Pepsi ever mentioning in an annual report that their future hinged on the future of Greece. That’s probably because it doesn’t.
Either way, you can’t control Greece. You can’t control what Europe (or any other country) does. What you can control, though, is your own behavior: your spending, investing, and consistency.
So stick to your long-term plan. Ignore the noise and focus on what you can control.

Risks

WPC is truly international, so they face currency risks like any other company doing business globally.
In addition, they face interest rate risk in the sense that as rates rise the cost of capital increases. Though this is also true for almost every business out there that relies on some debt to conduct business and grow, this is exacerbated for REITs because of their structure.
Another risk is that 25% of WPC’s leases expire within the next five years. Any issues with renewals could be problematic.
Furthermore, only 26% of their tenants are investment-grade.
Lastly, although they have substantial experience in their field dating back decades, their operating history as a REIT is rather short.

Valuation

WPC’s P/AFFO ratio is currently 12.53, which I find really attractive when you consider the quality, track record, valuation, growth, and yield.
The yield is 6.41% right now. That’s obviously very appealing to anyone who’s interested in current income in the sense that every dividend dollar gets one that much closer to independence. That’s also substantially higher than the five-year average for this stock. So you’re getting a lot of yield both in absolute and relative terms.
I valued shares using a dividend discount model analysis with an 8% discount rate and a very conservative 4% long-term dividend growth rate. That’s almost half the DGR over the last decade, which gives a rather large margin of safety to account for rising rates and some of the other unique risks I touched on above. The DDM analysis gives me a fair value of $99.06.
This stock could be significantly undervalued here as it exhibits a rare and elusive combination of yield and dividend growth that are both quite high. It’s just not particularly often that you can buy a stock with a yield of well over 6% and long-term dividend growth in the upper single digits.

Conclusion

I continue to really like WPC here. It appears to be a stock on the low end of its recent historical norms in terms of valuation and yield in a market that is otherwise rather expensive. And the combination of yield and dividend growth is incredibly attractive to me.
I love the firm’s real estate portfolio. It’s incredibly diversified both in terms of industry and geography. While I love another of my REIT holdings in Realty Income Corp. (O), WPC gives me better diversification, higher yield, more aggressive growth, and a much lower valuation. All that with a dividend growth track record that doesn’t trail O by much. I’m very interested in adding to O at some point here as well, but I find WPC far more enticing at this point in time.
WPC has quickly become a rather large position for the portfolio, especially in regards to the dividend income it generates. So I’m not particularly interested in adding a lot more over the near term, but I also wouldn’t shy away from averaging down again, if given the opportunity.
This purchase adds $95.40 to my annual dividend income, based on the current $0.9540 quarterly dividend.
I usually include current valuation opinions from other analysts, but neither Morningstar nor S&P Capital IQ follow this stock.
I’ll update my Freedom Fund in early August to reflect this recent purchase.
Full Disclosure: Long WPC, PEP, AFL, and O.
Are you a fellow WPC shareholder? Have you been averaging down? Why or why not? 
Thanks for reading.

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1 comment:

  1. I initiated a **small** position last week as well. Cheers :)

    ReplyDelete

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