The dividend yields on some top stocks now are really compelling and WP Carey (NYSE:WPC) ranks among the top of the list. Paying a 7.58% yield now, the REIT eclipses the payout from a 3-month Treasury bill by quite some margin, plus it offers upside share price potential.
The concern for shareholders is that WPC share price has plummeted by 26.2% for the year, more than offsetting the handsome dividend reward. Will the bearish momentum continue or is the worst over for WP Carey?
The Bull Case for WP Carey
WP Carey has much to offer investors beyond a highly attractive dividend yield. For one, its diversified investment portfolio stands apart from the single property type that is typical of so many REITs. The real estate investment trust holds a wide array of property types, including industrial and warehouse facilities.
By spreading itself far and wide from office and retail to self-storage buildings, the company lowers the risk of being severely impacted by market swings in any given sector. It is further protected against downturns through its international exposure that spans from the United States to Europe, including robust economies like Germany and The Netherlands.
In the world real estate investment trusts, triple-net lease structures are highly attractive because tenants pay property costs such as taxes, insurance and maintenance. A good portion of WP Carey properties are under this attractive NNN banner resulting in lower overhead costs and more predictable cash flows.
In addition to geographic and sector diversification, as well as the triple-net approach favored by management, a high percentage of the firm’s tenants rank as investment grade, meaning their credit ratings are sufficiently high to substantially lower the risk of lease payment default. As a result, shareholders can have even more confidence in the predictability of the revenue streams.
All of the pluses lead to an enticing dividend and, in that respect, management has been stellar by predictably growing the dividend in a way that attracts income-oriented investors like moths to a flame. A steady and consistent dividend shows commitment by the Board to shareholders, and it’s further cemented when it continues during downturns in the economy. With a 12-year growth streak, it’s clear that WP Carey ranks highly in this category.
With all that said, the share price needs to remain stable or rise in order for the full benefits of the dividend to be enjoyed, and over the past year, that simply has not been the case. But the pullback in share price does offer an opportunity, not only to capture a higher yield, but also to potentially buy a stock on sale.
Is WP Carey Stock Undervalued?
According to the nine analysts covering the stock, WP Carey is undervalued by 6.1% with a price target of $59.62 per share.
Interestingly, a discounted cash flow forecast analysis tends to align very closely with the analysts’ consensus, and places fair value at $59.15 per share.
In the short-term the upside potential is modest but, for investors with a long-term focus, real estate is an excellent inflation hedge, and particularly when factoring in rent escalations from lease agreements. Even better if those hikes in rental payments are tied to inflation.
It can’t be over-emphasized that WP Carey has a focus on high quality assets and divesting non-core properties to ensure its portfolio is optimized for current market conditions. By strategically acquiring high-performing properties and disposing of poorer ones, the REIT has earned a reputation for quality, predictable revenues, and dividend stability.
At this time, income investors may have some just cause for concern given that the payout ratio sits at 117%, a figure too high for our liking, especially as anything above 100% for an ongoing period tends to trigger payout sustainability concerns.
Financials Are Really Impressive
There is really a lot to like about WP Carey stock. The company’s earnings quality is high and free cash flow is abundant, even exceeding net income. Indeed EPS figures have been steadily rising in spite of the share price declines.
Analysts are upbeat about the firm’s revenues too for this upcoming year, forecasting further growth on the back of stunning quarterly growth over the past four quarters, featuring year-over-year gains of 18.6%, 24.1%, 29.8%, and 16.8% respectively.
In addition to analysts and a DCF analysis placing fair value higher, a price-to-earnings analysis suggests the company is looking pretty good, too, sitting at 16.1x.
With gross margins north of 90% consistently and EBIT regularly hovering around the $200 million mark quarterly, WP Carey is highly appealing no matter how you look at it.
Incredibly, WP Carey share price has dipped close to lows not seen since 2020 when commercial real estate concerns were arguably heightened versus today.
For a company with a decade-plus dividend growth streak yielding over 7% and on a path to reporting almost $1 billion in earnings before interest and taxes annually, all while trading at a P/E of just 16x, WP Carey is starting to look highly appealing.
Although analysts are relatively muted about the potential upside for the share price at this time, the stock is starting to look like a real bargain for any long-term focused investor willing to bet that asset price inflation and rent escalations will eventually favor WPC financials.
Already cash flows and earnings are looking good, and sales growth is forecast for the upcoming year so, across the board, it’s hard to find too many flaws with how management is executing.
Clearly, the big gorillas in the room are a combination of higher interest rates and vacancy rate risks as remote work continues to be a new norm for many tenants.
Still, WP Carey has a proven track record of focusing heavily on quality tenants and triple-net leases so the odds are high that it will work its way through this choppy environment better than most REITs and come out the other side even stronger.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.