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A Retirement Savings Stock Every Investor Should Own
Thursday, March 14, 2013 8:30 AM
Whenever I need inspiration for a new stock idea, I think about Levi Strauss.
Yes, Levi Strauss -- the man who invented blue jeans. As a scrappy European immigrant to the land of opportunity, Strauss went West during the California Gold Rush in the mid-1800s seeking his fortune. But he didn't go as a prospector. Instead, Strauss made his first fortune selling pick axes, shovels and other supplies to 49ers who were in search of gold. His second and much larger fortune was made when he decided to make pants out of tent canvas, dye them blue with indigo and sell the durable outerwear to would-be gold miners.
Simply put, Strauss was an expert in finding trends and profiting from them.
This kind of savviness reminds me of a company I've followed for more than a decade now. I'm talking about Senior Housing Properties Trust (NYSE: SNH), a real estate investment trust (REIT).
And I like this company particularly now, because it's seizing a huge opportunity to make aa of money.
Let me explain...
As 10,000 people in the United States turn 65 every day, they'll need somewhere to go as they get older and need more care. Senior Housing manages a $5.3 billion portfolio consisting of nearly 400 properties that include senior-living centers, skilled-nursing facilities, medical office buildings and wellness centers across 40 U.S. states.
Strike gold with the golden years...
These undeniable demographic trends and the stock's consistent performance, make Senior Housing a great addition to any retirement portfolio. It's already a core holding in many of my client's portfolios. Carla Pasternak, director of income research for StreetAuthority's High-Yield, also has recommended it as a key Retirement Savings Stock.
The company has been expanding quickly. This past year, Senior Housing raised more than $650 million in capital market transactions and gained access to a $750 million unsecured credit . Despite this fast growth, it's been able to keep a lowly-levered compared to most REITS, with a debt-to-capital ratio of just 37%.
In addition, the company has performed consistently through the years. Besides a growing stock price, Senior Housing has steadily raised thefrom $1.20 a share in 2000 to a recent $1.56 a share, which brings the yield to just over 6%. Add that to and you have a compounded annual return of 47% during the past 13 years. Not bad for a "lost decade" of investing...
The fact that REITs are required by law to pay 90% of their income as dividends to shareholders -- regardless of whether their share price goes up or down -- makes this an even sweeter deal.
Risks to Consider: Although the lion's share of Senior Housing is private pay -- which implies relatively affluent tenants -- tougher economic conditions or external circumstances such as, could affect the company's pool of qualified prospects in the senior lifestyle and assisted-living segment. In addition, as part as their different tax structure, REITs don't pay income . This means their dividends are usually fully taxable.
Action to Take --> I see Senior Housing as a long-term holding, especially if you are building a retirement, income-focused portfolio. This doesn't the stock can't perform well in the short term. Based on favorable long-term demographics and the company's historic consistency, a 12-month of $29 is completely reasonable. Factoring in dividend income, this translates into a 22% total return.
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Adam Fischbaum does not personally hold positions in any securities mentioned in this article.StreetAuthority LLC owns shares of SNH in one or more of its “real money” portfolios.