Shareholders of Omega Healthcare Investors (NYSE:OHI) has seen their holdings decrease for quite some time. In 2017, the stock decreased 20% and in the past three years, the total price return has been 37.17%. However, if one focus on total return, the investment hasn’t been that bad. Omega Healthcare Investors yields close to 10%, but the real question is if the dividend is safe.
One of the most searched and commented stocks on forums such as SeakingAlpha is Realty Income Group (NYSE:O) and Omega Healthcare Investors. The number 1 REIT contributor on the forum, Brad Thomas, has consequently praised both companies, telling investors that both companies are rock solid and a so-called SWAN stock. SWAN stands for Sleep Well at Night.
Recent debate on the forum has shown that the case for both companies might be worse than what the accredited contributor claims. Two recent articles, “Omega Takes a Swan Dive” and “Spruce Point Capital takes aim at Realty Income”, both show great weakness in the two investments. Just recently, management of Omega Healthcare Investors decided to freeze the dividend growth, with the following explanation:
“As a result of our strategic repositioning activities, 2018 will not be a growth year, and therefore, we do not expect to increase the dividend during 2018” – C. Taylor Picket
The REIT sector as a whole has suffered from increased interest rates. While the iShares Global REIT ETF (NYSE:REET) is down 8.24%, many single REIT securities are down double digit. Retail and Healthcare has been the worst sectors by far. The dividend freeze is one thing, but the ongoing tenant problem is the huge problem. As of now, the company needs to fund the high yield with further debt. Naturally, this is a warning sign for most investors, since they are saying that they don’t have the funds to cover the dividend, but they pay it anyhow.
A dividend cut?
The great question is about dividend safety. If it turns out that management has failed to understand the future outlooks, and earnings will decrease, then a dividend cut is unavoidable. Some short-minded investors argue that this is okay, cause the dividend will still be above 5%, but that’s not true. A 40% dividend cut will smash the share-price down a lot, and it might take decades, if that even happens, before the price is back to prior prices.
We advise that all shareholders of Omega Healthcare Investors reflect upon their holdings and we don’t see this investment as a SWAN stock. This is a high risk and little reward case.
The author owns shares in Realty Income Group.