STORE Capital Stock: a secure dividend yield (NYSE: STOR)
Due to previous professional experiences, I have periodically followed and written about a few REIT stocks. And STORE Capital (NYSE: STOR) is one of them. As you can see from the table below, I have been maintain a lukewarm feeling about it in the past. I’ve written several articles over the past year explaining why this is a good deal, but found it to be overrated.
Recently, it caught my eye again as it popped up during my screening because its dividend yield hit an all-time high since its IPO. Usually, when this happens, there must be signs that the company cannot sustain its dividends for the foreseeable future. However, upon taking a closer look at his finances, that is not the case at all. In fact, its dividend security and financial strength are nearing a decade high, as you’ll see next.
Max Level Yield
The dividend yield for STOR has been pretty stable and fluctuated in a very narrow range if you exclude outliers in the COVID 2020 crash data points. And that’s of course a good sign for any stable and profitable company, in particular for a REIT business, as it pays out most of the profits in the form of dividends. As you can see, its return has been stable in a range between about 3.28% and 5.9% with an average of 4.54%.
Consequently, its current yield of 5.59% is not only well above its long-term average (of 23%) but also close to the all-time high since its IPO.
As mentioned above, the next logical step is to check whether there are reasons to worry about the sustainability of its dividend in the near future, as we will do immediately in the next section.
Maximum dividend security
As you can see from the next chart, its dividend safety is actually quite normal from its all-time high and quite conservative for REIT business (see Chart 2 below). Here you have to again ignore the outlier data points in 2013, when its dividends have stabilized yet again. After that, its cash payout ratio was in a stable range of 60% to 80% with a long-term average of 65.6%. And his current payout ratio of 68.2% is not only close to his historical average, but also towards the lower end of the historical spectrum.
Going forward, thanks to its pricing power, I expect it to maintain a healthy yield spread (more on this in the next section) above Treasury and Treasury rates. borrow and maintain earnings sustainability, as CEO Mary Fedewa commented (abbreviated and underlined by me):
With pricing power from the outset and our disciplined underwriting process, which includes thorough analysis of both client credit and real estate value, we are able to make accretive acquisitions with wide spreads, resulting in attractive risk-adjusted returns. We also have strong organic growth of 5% between our annual rent increases, which average 1.8% across the portfolio, our retained cash flow from our low payout ratio, which was 67.5% this quarter, and proceeds of disposition.
The funding flexibility that we have built over the past decade positions us well to fund our growing pipeline of acquisitions with debt and equity options, enabling us to optimize our cost of capital to generate attractive spreads .
Balance sheet at the highest level
The next thing to check is any deterioration in the balance sheet. And the answer is still no. Its financial strength is currently near an all-time high, as you can see in the following interest coverage ratio. Its Times Interest Earned ratio has fluctuated from around a low of 1.46x to a high of 2.96x in the past. The current value is around 2.68x, close to its maximum level. The root causes are pricing power and disciplined acquisition to ensure a wide yield spread, as noted above (and illustrated in Chart 2 below). the leverage ratio in terms of debt to EBITDA is around 5.7x and is also towards the end of the target range.
In the future, the company has sufficient liquidity. as CFO Sherry Rexroad commented (abbreviated and underlined by me). The long-term debt has an average maturity of 7 years at a modest rate of 3.9% and therefore will not cause any problems in the short term.
We ended the quarter with a strong balance sheet and ample access to capital, including $39 million in cash, approximately $370 million available through our ATM program and available borrowing capacity through our revolving credit facility. As of March 31, we had $4.2 billion of long-term fixed rate debt outstanding with a weighted average maturity of just under 7 years, and as previously indicated, a weighted average interest rate of 3.9%. Leverage is at the lower end of our target range of 5.7x net debt to EBITDA based on a current rate or less than 40% based on the net debt/portfolio cost ratio.
Final thoughts and risks
It appears the market is overestimating STOR’s 5.6% return. It is indeed oddly high for a stable REIT like STOR, not only above its long-term average of 23%, but also close to its all-time high since its IPO. However, its dividend security is actually quite normal compared to its all-time high and quite conservative compared to other peers. And I don’t see any problem with the sustainability of profitability or the balance sheet.
There are, however, a few risks worth mentioning. STOR has tenants that may be directly exposed to the pandemic, such as restaurants, theaters and health clubs. Additionally, STOR Founder and Executive Chairman Chris Volk recently stepped down as Chairman. Volk has been a successful serial entrepreneur. Berkshire Hathaway’s Q1 2022 disclosure (reported after Volk left) showed a nearly 40% reduction in its STOR positions. I’m not trying to imply a causal relationship here just because one thing happened before the other. But given Buffett’s style of investing, I think Volk should factor into Buffett’s decision to invest in STOR in the first place.