The Amazon [AMZN] juggernaut continues to wipe out profits of national retail brands and in some cases destroy them altogether. The latest casualty Toys’R’Us is an ominous sign of what’s to come for brick-and-mortar retail stores.
So you might be forgiven for wondering what Warren Buffett is thinking by buying a 9.8% stake in Store Capital [STOR]. Is the Store Capital dividend the reason? Or is there is some other reason lurking under the surface?
Why Buy Store Capital Stock?
The writing is on the wall that technology will disrupt high street retail stores. But surprisingly, approximately 9,000 store closures last year didn’t affect Store Capital [STOR] much. So what is it about the Store Capital business model that cushions it from technological disruption?
To answer that question and the reasons why Buffett purchased such a large stake of Store Capital stock, we first need to shed light on the company itself.
If you are not already familiar with Store Capital Corp, it is an internally managed net-lease real estate investment trust, or REIT. It acquires, invests, and manages Single Tenant Operational Real Estate, which is the inspiration behind the name of the company: STORE Capital.
With over 2,000 existing locations and an average of $100 million in monthly new purchases, Store Capital Corp has a well diversified portfolio spread across 49 states.
But is that diversification enough reason to buy Store Capital stock? When we dig deeper, the compelling reason that motivated Buffett to buy such a large stake of Store Capital stock appears.
The Genius Of The Store Capital Corp Business Model
The genius of the Store Capital business model is its focus on service-oriented businesses. In fact, Store Capital CEO Chris Volk claims the company is not a retail company. Instead the REIT specializes in business that cannot be disrupted easily through technological innovation.
While most people assume real estate falls into one of four categories: retail, industrial, office, and multi-family, Store Capital [STOR] spreads its wings further and owns service-type assets. For example, restaurants, early childhood education, fitness clubs, movie theaters, veterinary clinics, pet boarding centers, oncology clinics, and urgent care clinics.
By focusing on these service-oriented businesses, Store Capital didn’t experience much pain last year when around 9,000 retail stores closed. And that in a nutshell is why Buffett purchased such a large stake in Store Capital. Because the assets owned by Store Capital are businesses that cannot be delivered over the internet, they are largely buffered from the winds of technological disruption and change.
Furthermore, the businesses operating in the real estate Store Capital owns have their own P&Ls hooked to those locations. And that’s the kind of business model Buffett likes; one which isn’t going to be blown away by Amazon [AMZN], Alphabet [GOOGL], or Facebook [FB] anytime soon.
How Much Is The Store Capital Dividend?
Not only does Store Capital have a genius business model to stand the test of time against disruptive innovation but it also has a generous dividend, another reason Buffett is a fan.
When you examine Buffett’s stock portfolio, it’s peppered with dividend-paying stocks. Companies like Wells Fargo [WFC], Coca Cola [KO], American Express [AXP], and The Kraft Heinz Company [KHC] all pay handsome dividends.
And the Store Capital dividend is healthy too, paying north of 4.5% at the time of our research. That’s the kind of income stream Buffett loves to pocket. And because Store Capital Corp is structured as a REIT, it must pay out a good chunk of profits as shareholder dividends so the cash flow is predictable.
Lastly, Store Capital earns a 9 out of 10 ISS Governance QualityScore for shareholder rights, which is yet another reason Buffett gave the company his vote of confidence.
The bottom line is a smart business model that is largely immune to technological disruption, a generous dividend, and strong shareholder rights are three big reasons why Buffett voted with his checkbook to buy a large stake in Store Capital.