From 0.0% to 8.5%, the World's Greatest Secret Dividend Growth Story
The other day I came across possibly the best dividend growth story in the market today. Better yet, it's a secret. OK, it's not really a secret, but it's a small cap stock that is completely transforming itself that not many people are talking about.
Adcare Health Systems (ADK) is in the business of acquiring and managing senior living facilities, i.e. assisted living facilities, independent living facilities retirement communities, etc... Historically, the company has not done a good job at managing its facilities, so the it has decided to change its business model. After the transition later this year, Adcare will no longer managed these facilities, but instead it will own them and lease them out to operators who might be more competent. These assets have value, that is not being fully reflected in the company's stock. The move will allow it to begin paying a dividend to current investors and potentially eventually be sold to a healthcare REIT.
According to the company's press release, it will begin paying a quarterly dividend of $0.05 starting in Q4 2014. At today's share price, that is equivalent to an annual yield of 4.25%. Yawn. Wait, it gets better...the company will increase this dividend by $0.01 every quarter after that for "the forseeable future." If Adcare successfully executes this plan, that would put its dividend at a much more attractive 7.7% annualized in Q4 2015 and 11.6% in Q4 2016 (assuming that it can keep increasing it at that pace).
After reviewing the presentation, the company states that it will have an annualized dividend of $0.40/share in Q1 2016. That's equivalent to a yield of around 8.5% based upon today's share price. Let's look at how this yield stacks up against similar companies:
CareTrust REIT, Inc. (CTRE): 4.9%
Sabra Health Care REIT, Inc. (SBRA): 5.3%
Health Care REIT, Inc. (HCN): 5.0%
Omega Healthcare Investors Inc. (OHI): 5.5%
Aviv REIT, Inc. (AVIV) 5.0%
This implies that there's 50%+ upside in the stock once the dividend hits this attractive level a year and a half from now plus you will be able to collect the dividend along the way while you wait once it starts later this year. Plus additional potential gains if the company was to be bought out by a bigger healthcare REIT, which there's no shortage of today and it has expressed being open to.
With NewCastle (NCT), Extendicare (EXETF), Ensign Group (ENSG) and CareTrust REIT (CTRE) already in my portfolio I wasn't exactly looking for another senior living play, but you take what Mr. Market gives you. At least the sector has tremendous demographic tailwinds. I definitely do find this one very interesting. Of course, there's always execution risk associated with this sort of transaction. Also, one has to question of a management team that was so terrible at managing these facilities can successfully complete this transition.
Here's the company's official announcement:
AdCare Announces Strategic Plan to Transition to a Facilities Holding Company
New Business Model Designed To Optimize Cash Flow and Unlock Shareholder
and my favorite, an investor presentation...
Here's a link to an excellent Value Walk article that first brought this situation to my attention:
AdCare Health Systems: NOLs, REIT Conversion, Cash Allocation
I'd love to hear others' thoughts on this idea or any other special situation investment ideas that they have.
Thanks for reading. Have a great weekend!