Our top pick for stagflation: STORE Capital Stock (NYSE: STOR)
Fears of a recession are soaring, pushing stock prices and bond yields lower. Public figures ranging from Bill Gates to billionaire Leon Cooperman have recently signaled that a global recession may be underway. in a short time. In fact, the United States could already be there given that GDP fell in the first quarter and China is certainly reeling from its aggressive COVID-19 lockdowns in highly productive cities such as Shanghai.
As a result, the stock market has been in panic mode lately, with the S&P 500 (SPY) and Nasdaq (QQQ) battered:
We are not prepared to take a position on whether or not we will slide into recession, as we generally refrain from making macroeconomic forecasts. However, we believe that the market seems to be too pessimistic on certain values.
In particular, we are bullish on the REIT STORE Capital Corporation triple net lease (NYSE: STOR), as we believe it provides bond-like income during recessionary times, while offering higher yield and growth than bonds.
Bond-type income security
While bonds are obviously generally very safe sources of income due to their seniority in the capital stack, we believe STOR’s dividend payout is almost as safe.
First, STOR’s dividend payout has not suffered a decline despite its business model being strained during the COVID-19 shutdowns. In fact, the REIT continued to grow its dividend at a mid-single digit rate (4.4%) in 2020 and has since accelerated that rate of growth to 4.9% in 2021. It is expected to grow 6.2 % in 2022. If STOR could increase its dividend at a more than token pace in 2020, it will likely take a very severe depression to force STOR to cut its dividend.
Further evidence of STOR’s dividend safety is the performance of peer REITs like Realty Income (O) and National Retail Properties (NNN) during the Great Recession. In 2008, O increased its dividend by 6.5% and in 2009 it increased its dividend by 2.7%. In 2010 and 2011, it increased its dividend by 0.9% each year before the company saw dividend growth accelerate in subsequent years. NNN, meanwhile, increased its dividend by 5.7% in 2008, in 2009 it increased its dividend by 1.4%, and in 2010 and 2011 it increased its dividend by 0.7% and 1 .3%, respectively, before the company saw dividend growth accelerating in subsequent years. If similarly structured REITs with weaker balance sheets then than STOR today could sustain their dividend growth during these extremely difficult times, we believe STOR could do so today as well.
One of the main reasons these investment grade triple net lease REITs have held up so well during the Great Recession and COVID-19 shutdowns, and likely will again, is due to their conservative business models. STOR benefits from immense diversification with 573 customers in 121 industries. Its top customer contributes only 3% of its total base rent, and its top 10 customers contribute only 18% of its total base rent.
Plus, leases are higher in the bond pile, so companies essentially have to go bankrupt before they break their leases, and – with 4.7x rent coverage – it’s highly unlikely that a large percentage of STOR’s tenants default during a downturn.
Finally, these leases are fixed for long periods, the weighted average duration of leases on new investments being 17 years.
With an investment-grade balance sheet that provides STOR with great financial flexibility and a 2022 dividend payout rate that is expected to reach just 71.5%, in addition to the very conservative business model, the dividend looks very secure.
Higher yield than bonds
In addition to the income security offered by STOR, its yield is also very attractive at 6%. This yield puts it on par with that offered by an emerging market junk bond index fund (GBFAX):
From a risk perspective, we feel much more confident in the safety of a well-diversified portfolio of U.S. commercial real estate with the added safety components offered by the triple net lease structure and an investment grade balance sheet than we do. we do in emerging markets. obligations. Yet today, you can get a similar return buying STOR shares as you would investing in emerging market junk bonds.
Compared to US bonds, the yield spread becomes quite marked:
Growth superior to that of bonds
Last but not least, not only is STOR’s income stream bond-like and its current yield equal to or better than most bond funds, but its growth potential is far greater. While bonds offer zero growth potential, STOR has increased its dividend per share at a CAGR of 5.9% so far and expects to continue to generate single-digit annualized growth for the foreseeable future. As a result, its value proposition as a recession-proof high yield looks even more valuable, especially relative to bonds.
Key takeaway for investors
With the market in panic mode over the growing risk of recession, it appears to be irrationally throwing recession-proof dividend growth stocks at increasingly attractive prices.
While some retirees may panic and buy bonds to earn cash to weather the storm, they might consider STOR instead. With a proven business model and real estate portfolio, a very attractive current yield and solid growth momentum that should help mitigate some of the negative impacts of inflation on purchasing power, STOR is an ideal bond substitute in these times. of stagflation.