My Portfolio Holdings – HCP

In addition to posting posting our portfolio and the income we receive from it, I'm going to also post my reasoning for purchasing these companies.  Overall, investing is about buying companies that add value to your portfolio.  These assets should pay you back in a higher share price, dividends or both.  My main focus is on receiving dividend payments so that i can reinvest those dividends by buying more companies.  I think that if my strategy was to simply trade stocks based on price fluctuations, I'd be a poor steward of my finances.  I'd pay commission fees in what is essentially gambling on hot stock tips.  I'd much rather think like a business owner, and invest for the long term.  I do speculate sometimes, but not in a way that would risk my family's ability to give or pay our expenses.  Our goal is to create a portfolio of assets that generate income, so that we can use that income to bless others.  Let's look at how HCP accomplishes that.

Business Description

HCP Inc.(HCP) is a fully integrated real estate investment trust (REIT) that serves the largest sector of the U.S. economy, the healthcare industry.  The company acquires, develops, keases, sells and manages healthcare real estate.  They are also a capital partner to some of the leading healthcare providers.  HCP has built a business model that involves mutiple paths of creating ownership interests in real estate. Thes paths include debt investments, sole ownership, joint ventures and development to name a few.  The types of real estate included in their portfolio are senior housing, post-acute/skilled nursing, life science, medical offices, and hospitals.  This creates a stable and diversified real estate portfolio in an industry that will always be apart of our economy.  It is the first healthcare REIT to be included in the S&P 500.

What Matters Most: Cash Money

Before we talk about the company's cash holdings and ratios, I think it's important to talk about its debt.  For real estate, debt can be a double edged sword by allowing a company to leverage ownership with a smaller amount of capital, but too much debt can crush a company if their payments get too high to manage.  HCP currently has over $8.6 billion in debt on its balance sheet.  This wouldn't be a major concern if a company has enough debt to cover its debt obligations.  HCP currently has $54 million in cash, which isn't enough to cover all of its current liabilities but does cover it's current debt obligation.  This is a little alarming for HCP, but I'm confident that their business strategy will continue to be profitable in the long run. HCP's current ratio is 1.22, which means HCP can convert its other current assets into cash and can cover their current obligations for the year. The good news is that HCP has a fixed rate of interest on its debt, which is easier to manage, and more desirable than an adjustable rate.  HCP has free cash flow of $696 million and free cash flow per share of $1.52. HCP's P/FCF is currently 28.2, which is high for me.  I usually like to invest in companies with a P/FCF of 15 or below.

Cash Dividends

Dividends - The privilege of ownership

I like to invest in companies that pay a dividend in order to reduce my risk, earn a return on my capital invested, and reinvest those dividend payments into a snowball of dividend checks.  HCP is a dividend aristocrat, which means that it has maintained or increased its dividend payments for at least 25 years. For HCP is has been 29 years of increasing dividends, which signals a stable, reliable and growing stream of income.  HCP's dividend yield is 5.11%, and they pay $.545 a share on a quarterly basis totaling to $2.18 a year.  HCP has a payout ratio of 109% when dividing dividends over earning and a ratio of 143% when compared to free cash flow.  This could be a cause for concern, and hopefully the company can manage its cash flow better so that there aren't any concerns about the stability of its dividend.  I like to do some calculations to see how long it would take one share of a company's dividend payments to equal another share, if prices remained the same and dividend payments were held for the sole purpose of buying one more share, with no compunding.  It would take 19.5 years for one share to become two HCP shares with the current level of dividend payments.  I also like to calculate how many shares an investor would need to buy now in order to generate the equivalent of one share in dividend payments a year, all else being equal.  Its interesting to note that if an investor wanted to generate the cash in dividend payments for one share this year, it is equal to the amount of time it would take for one share to double from its dividend yield.  Buying 19.5 shares would result in an extra share at the end of the year, generated by passive dividend income.

Book Value - Real Company Value

HCP's P/B ratio is 1.8, meaning it is priced almost double its actual value.  I personally like to invest in companies with a P/B ratio of 2 or less, and in some cases I'll invest in companies with a higher P/B if the income stream of dividends is worth paying more for it.  Since HCP is a healthcare REIT, it's no surprise that the majority of it's value is derived from its property holdings.

Income - How well a company is managed

I normally don't like to rely on the income statement as a measure of value.  I do think it offers the best glimpse of how well a company is able to manage it's expenses while generating revenue, but I'll rely more on the cash flow statement to find value.  P/E ratio of 19.7. Most people invest in companies that have a P/E ratio between 15 and 25, while companies with a P/E ratio of 20 are seen as fairly valued.  Honestly I don't care too much about P/E ratios, but it can help me gauge whether or not I can pass up on a company that is priced too high, and look for other companies.  With a gross margin of 85%, a operating margin of 40% and a net margin of 46%, HCP is retaining a healthy portion of its revenue while collecting interest payments on the mortgage loans it makes to healthcare providers.

Valuation

HCP DCF Analysis

Using Guru's DCF calculator, and inputing FCF of $1.52 we get a valuation of $28 a share, and $50.3 a share after adding tangible book value.  Since the company has so much property it's import to consider their tangible book value per share.  The company isn't cheap when looking at it's P/FCF, P/E, and P/B ratios.  An investor would have to seriously consider their investment philosophy and see whather investing in this business coincides with their philosophy.

Why I’m Investing in HCP

I'm investing in HCP because I have a very long investing horizon of at least 40 years.  Within that time frame I'm sure there will be a need for healthcare real estate. I also think that HCP will continue to be a dividend aristocrat and pay a healthy dividend.  My philosphy is to invest in companies that pay a dividend so that I can reinvest those dividends and buy more companies. HCP is a business that helps me do that.

Disclosure: Long HCP

1 Comment

  1. Income Investor says: Reply

    Nice analysis man. I’ve got a couple of dividend aristocrats in my portfolio and can’t complain 😀 Good luck with your portfolio!

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