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Warren Buffett dislikes paying dividends, but he sure likes receiving them.
Rare is the non-dividend addition to Berkshire Hathaway’s (NYSE: BRK.b) investment portfolio. General Electric (NYSE: GE) is kicked to the curb. Synchrony Financial (NYSE: SYF), a GE spin-off, is welcomed with open arms. Both pay dividends.
The new edition, Synchrony, is “OK” as far as dividend stocks go. Its dividend yields 2%, on par with the S&P 500. You can do a lot better with another recent Buffett purchase.
Berkshire paid $377 million for a 9.8% stake in Store Capital (NYSE: STOR). The attraction is easy enough to understand from an income-investor’s perspective: Dividend growth and immediate high-yield income are the attraction.
The dividend has been increased annually since Store Capital’s 2014 IPO. Berkshire was able to accumulate a stake that offered a 5.5% yield on its cost basis.
Berkshire paid a value price. Store Capital shares were down 30% from their 52-week high. Retail REITs, the group in which Store Capital technically fits, had wilted under the great e-commerce threat. Amazon.com (NASDAQ: AMZN) upped the thermostats with its proposed acquisition of Whole Foods Market (NYSE: WFM).
But dig deeper into Store Capital and you find a retail REIT more immune to the e-commerce threat than most.
Superior management offers a degree of immunity. Though Store Capital has been publicly traded since only 2014, senior management has a 35-year track record of growth. Management has grown Store Capital’s real estate portfolio to $5.2 billion from $1.6 billion in four years.
Property composition offers another degree of immunity. We’re not talking 1970s-era shopping malls here. Approximately 67% of Store Capital’s properties are dedicated to retail locations where e-commerce is challenged to compete: early childhood education, health clubs, pet care, movie theaters, and family entertainment destinations.
Fifteen percent of Store Capital’s properties are dedicated to manufacturing. There’s no getting around physics. Manufacturing requires a physical location.
The remaining 18% could be vulnerable to Amazon et al. But even here, customers prefer to touch before they buy. The remainder of Store Capital’s properties is dedicated to furniture stores, hobby & craft centers, and hunting and outdoor outfitters.
Store Capital’s success is measured in cash; in real estate, cash is king. Funds from operations (FFO) is the key metric in valuing a REIT. FFO is the cash to support the dividend. As FFO goes, so goes the dividend.
Store Capital has kept cumulative FFO and cumulative dividends trending in the right direction. FFO for 2016 was reported at $246 million. That’s a 34% increase over the $184 million reported at the end of 2015.
The momentum continues in 2017. FFO for the second quarter was reported at $76.4 million compared with $70 million in the first quarter.
Store Capital’s growth has done nothing but enhance the individual investor’s value. I see nothing but per-share growth in both FFO and dividends despite more shares and more debt.
Store Capital paid $1.13 in per-share dividends last year. In 2015, it paid $1.08. Store Capital’s dividend consumed 68% of FFO last year compared with 72% in 2015.
The dividend grows and Store Capital management grows the business to maintain the growth. As the business has grown, the dividend has actually consumed less FFO compared with past years.
Store Capital’s dividend yields 4.8% today, less than the yield Berkshire captured. But the dividend and the yield it provides are still worth buying. Store Capital’s shares are still a value. The shares still trade at a 19% discount to their 52-week high.