HCP is changing and in my last notes I was writing more what selling of QCP can change. In fact QCP performed very good after spin-off. That’s in fact a common knowledge that companies which are spun off are very often a good investments. Then you can ask me why I didn’t invest? Well, I was too focused on HCP as big name that I didn’t even consider it. My main aim is to invest in large caps, which are definitely less risky (really?). Now we should look at HCP as a stand-alone business. Maybe not superb performing HCP is an investment opportunity when market is in rally?
And here comes fundamental question. If you are to invest what would you choose, 10 year government bond or HCP with 5% dividend yield, increasing Cash NOI, but risk that interest rates go up and cost of debt will significantly increase?
Well, look here:
Most of debt is fixed rate. It means that increase in interest rates will not hurt company a lot. OK, newly issued debt will be more expensive, but average maturity is high, so it will take some time for cost of debt to increase significantly.
If we look on NAV per share we can read: At December 31, 2016, we had 468 million shares of common stock outstanding, equity totaled $5.9 billion, and our equity securities had a market value of $14.1 billion. It means that each share has around $12.6 book value. Why are investors paying significantly more? Well most of these assets are kept on historical cost. We should have a look on how much are these assets earning when making investment decision.
Company is expected to make Diluted FFO as Adjusted Per Share of around $1.90. It means that investors are paying 15.3 times for each dollar generated from operations. So cheap? Not really. Remember that there is depreciation and amortization included. And there is also reinvestment CAPEX. It means that you are not earning $1.9, because some of it must be reinvested!
Summing up, dividend yield is decent, but I don’t really feel how earnings might look like within 2-3 years. I prefer simple business, where accounting doesn’t matter so much.
Disclaimer: HCP – no position