Deep Value Dividend Growth Index Week 25 Update: REIT Carnage Continues

Posted On May 14, 2017 6:14 pm

Click here to read up on the intro to this portfolio, the theory behind it, and its methodology.

Overall it was a rather quiet week, with the S&P 500 remaining basically flat (down 0.3%), on a light sprinkle of economic news. The most important was that new jobless claims continue to be strong, with just 236,000 reported. Combined with about 5.7 million job openings the labor market remains resiliant which is good news for wage growth.

More important in the short-term is that corporate earnings have indeed been a big winner this quarter, indicating that the market does have a non-tax reform catalyst to maintain its current lofty levels. Specifically, with 91% of S&P 500 members now having reported 75% and 64% of beat their EPS and sales expectations, respectively. In fact, as a whole the S&P 500’s EPS is up 13.6% YOY, the best quarter since Q3 of 2011.

Meanwhile in terms of new additions to the portfolio we continue to enjoy a steady diet of lower priced triple net lease, and retail REITs, which fell 3.3%, and 3.6% on the week, respectively. That’s a combination of the market pricing in the June rate hike (78.5% probability) but also the ongoing concerns over traditional brick and mortar retailers falling victim to the rise of e-commerce led by Amazon (AMZN).

There are 2 important factors for value dividend growth investors to remember. First, the interest rate sensitivity of REITs generally follows the rule that the longer the leases are, the more rate sensitive the REIT. That’s because these kinds of REITs, especially triple net, and retail, use long-term, 10-20 year leases to lock in predictable cash flow. But this also means that they have less rental raising power in the face of rising inflation, which higher long-term rates signal.

As for the retail apocolypse, the truth is that C and B class malls are going to suffer, but the best retail REITs, such as Simon Property Group (SPG), Kimco Real Estate (KIM), and Tanger Factory Outlet Center (SKT) are focused on premium Class A malls, which continue to thrive. In other words, a classic “buy what the market hates” value opportunity.

Personally I wouldn’t mind if this REIT route continued for the next few weeks, months or even quarters. Warren Buffett became the 3rd richest man on earth, (and history’s best investor with 26% CAGR total returns over 50 years) by knowing what names in each industry were the best quality, and then buying in bulk, with both hands, when they were on sale, for as long as the opportunity persisted.

That is a strategy that we intend to follow as well. When opportunity knocks you have to buy fearlessly and with enthusiasm.

Portfolio Stats:

Portfolio Holdings: 200

Yield: 3.87% (S&P yield 1.94%)
Yield on Cost: 3.96%

Lowest Yielding Holdings:
MercadoLibre (MELI): 0.21%
NVIDIA (NVDA): 0.44%
Ball Corp (BLL): 0.50%
Shire PLC (SHPG): 0.50%
MarketAccess Holdings (MKTX): 0.71%
Dr. Reddy’s Laboratories (RDY): 0.74%
McKesson Corp (MKC): 0.77%
Expedia (EXPE): 0.80%
Charles Schwab (SCHD): 0.81%
FedEx (FDX): 0.83%

Highest Yielding Holdings:
New Residential Investment Corp (NRZ): 11.93%
Golar LNG Partners (GMLP): 10.94%
New Senior Investment Group (SNR): 10.72%
Dynagas LNG Partners (DLNG): 10.50%
Energy Transfer Partners (ETP): 9.30%
KNOT Offshore Partners (KNOT): 9.22%
Sprague Resources (SRLP): 9.08%
Starwood Property Trust (STWD): 8.88%
GasLog Partners (GLOP): 8.75%
Global Medical REIT (GMRE): 8.55%

Valuation Metrics

PE: 15.15 (23% below S&P 500)

Price/Fair Value: 0.85

FCF Margin: 16.36% (vs S&P 500’s 21.29%)

Return on Assets: 7.39% (3% above S&P 500 average)

Return on Equity: 23.59% (11% above S&P 500 average)

Average Market Cap: $12.1 billion (86% below S&P 500 average)

Projected 5 Year Dividend Growth: 9.24% (57% above S&P 500 20 year median)

Projected Annual Total Return: 13.2% (46% above the market’s historic CAGR since 1871)

Potential Annual Total Return: 17.1% (89% above market’s historical return)

Smallest Market Cap Holdings:
Global Medical REIT (GMRE): $169.9 million
Jernigan Capital (JCAP): $227.7  million
Farmland Partners (FPI): $331.6 million
City Office REIT (CIO): $368.5 million
Medequities Realty Trust (MRT): $388.6 million
PennantPark Floating Rate Capital (PFLT): $456.4 million
Westwood Holdings Group (WHG): $461.8 million
Dynagas LNG Partners (DLNG): $574.6 million
Sprague Resources (SRLP): $589.5 million
Easterly Government Properties (DEA): $743.8 million

Largest Market Cap Holdings:
Apple (AAPL): $825.3 billion
JPMorgan Chase (JPM): $308.0 billion
Wells Fargo (WFC): $261.4 billion
Bank Of America (BAC): $238.2 billion
AT&T (T): $236.9 billion
Procter & Gamble (PG): $220.5 billion
Pfizer (PFE): $196.8 billion
Novartis (NVS): $194.1 billion
Verizon Communications (VZ): $186.3 billion
Oracle (ORCL): $185.2 billion

Portfolio Composition: 

Consumer Cyclical:    29.37%
Healthcare:                     17.23%
REIT:                                 12.33%
Energy:                             10.00%
Industrials:                      7.17%
Consumer Defensive: 6.341%
Basic Materials:              5.32%
Finance:                            5.24%
Tech:                                   4.59%
Utilities:                             1.70%
Telecom:                           0.73%

Largest Holdings:
L Brands (LB): 7.68%
DineEquity (DIN): 3.93%
Teva Pharmaceuticals (TEVA): 3.26%
Perrigo (PRGO): 3.16%
McKesson (MCK): 2.33%
Expedia (EXPE): 2.25%
Helmerich & Payne (HP): 1.94%
VF Corp (VFC): 1.83%
HollyFrontier (HFC): 1.81%
Golar LNG Partners (GMLP): 1.78%
Kimco Realty (KIM): 1.77%

Top 10 Holdings: 31.74%

Worst Performers:
Helmerich & Payne (HP): : -7.29%
Macerich (MAC): -7.27%
Kimco Realty (KIM): -6.99%
Ramco-Gershenson Properties (RPT): -6.93%
Terra Nitrogen (TNH): -6.75%
Verizon (VZ): -6.54%
Simon Property Group (SPG): -5.78%
DineEquity (DIN): -5.75%
Ford (F): -5.71%
TD Ameritrade (TAMTD): -5.36%

Best Performers:
MercadoLibre (MELI): 51.42
Energy Transfer Partners (ETP): 40.96%
Apple (AAPL): 39.62%
Broadcom (AVGO): 38.37%
Delphi Automotive (DLPH): 35.45%
NextEra Energy Partners (NEP): 31.15%
Digital Realty Trust (DLR): 29.12%
NVDIA (NVDA): 28.56%
Vail Resorts (VAIL): 26.10%
Unilever (UL): 25.60%

Portfolio Performance:

Portfolio Annualized Total Return: 11.83%
S&P 500: 10.63%
Outperformance (Alpha): 1.20% (25 straight weeks of beating market, by 11% so far)

What I’m Watching This Week

In terms of economic reports the most important are: Housing Starts and Permits, Leading Indicators, and Initial jobless claims. In addition, we’ll have new data on industrial production which has been trending up recently, as well as the Philly Fed report, which is regional economic data.

Again, none of these reports is likely to be that important in terms of moving the market, but it all boils down to a number of snapshots that should give us an idea of whether or not Q2 2017’s GDP growth will indeed pick up after last quarter’s disaster. Was that truly seasonal weakness? Or a sign that our economy is truly running out of steam after eight years of a tepid recovery?

Corporate earnings season is pretty much done, with only Cisco (Wed), and Walmart (Thur) reporting this week.


About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, and DividendSensei.com My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 22 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams. I'm currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that: 1. Pays a 5% yield 2. Offers 7% annual dividend growth 3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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