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Why Omega Healthcare Investors is a Retiree's Dream Stock

By Chuck Saletta - May 23, 2021 at 2:30PM

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Demographic trends and corporate structure add up to a business with the potential to reward its investors over time.

Especially in today's environment where they face both low interest rates and rising inflation, retirees are staring down a serious risk when it comes to covering their costs. The longer they expect to live in retirement, the tougher a hurdle that combination creates when it comes to enabling them to pay their bills.

Despite their volatility and potential to be overvalued from time to time, stocks provide retirees with one of their best hopes to earn a high enough total return to keep up with inflation after taxes. Still, not any stock will do. Many retirees ideally want a combination of current income, potential income growth, and a strategic reason to believe those trends can continue. That combination puts Omega Healthcare Investors (OHI 2.85%) in the running to potentially be a retiree's dream stock.

Person in a wheelchair

Image source: Getty Images.

What does it do?

Omega Healthcare Investors is a Real Estate Investment Trust (REIT) that focuses on nursing homes and assisted living facilities.  As America's population ages and people continue to have smaller families, those demographic trends point to continuing demand for nursing homes and assisted living facilities for a long time to come. After all, children are often a huge part of caring for their aging parents, and if people have fewer children, it makes it more likely that professional help will be needed sooner.

In addition to those long-term trends, Omega Healthcare Investors just survived what has to have been one of the toughest years in a long time for its industry. After all, the COVID-19 pandemic hit nursing home residents and staffs particularly hard. That the company managed to maintain its dividend throughout the pandemic is a testament to its underlying financial strength today.

Especially since vaccines have become commonplace, Omega Healthcare Investors has reported a significant drop off in the COVID-19 cases at its facilities. That strongly suggests that the worst may very well be behind it from the pandemic. It also should start the process of people feeling more comfortable in and around nursing homes, which bodes well for its road to normalcy and recovery.

About its financials

Omega Healthcare Investors has a decent history of paying and increasing its dividend. While it maintained -- rather than increase -- that payment throughout the pandemic, only around 24% of that dividend was a return of capital during 2020, up only slightly from the 22% in 2019. That suggests that its cash generation remained remarkably solid even as it was dealing with the worst of the pandemic.

That dividend provides a solid current payout as well. At $0.67 per share per quarter, its dividend represents a 7.4% yield at the company's recent stock price of $36.11. As a Real Estate Investment Trust, Omega Healthcare Investors must pay out at least 90% of its earnings in its dividend. With that profile, it is likely that the company will keep a large dividend as long as its operations will support it. In addition, as the company recovers from the pandemic, it may be able to resume its dividend increases as well.

On top of that, the company's debt to equity ratio clocks in at a reasonable 1.3, and its current ratio is above 1.0. The current ratio above 1.0 means that it will likely have enough money to cover its near term bills coming due, even if its revenues continue to struggle. The debt to equity ratio is about the corporate equivalent of having a $130,000 mortgage on a house worth around $230,000. It indicates that the company should be able to manage its debt load as long as its business remains solid.

The combination adds up

With demographic trends favoring its business over the long haul, retirees have a good reason to believe Omega Healthcare Investors can thrive well into the future. With a balance sheet and operations that made it through a pandemic that struck its market particularly hard, those same retirees have a good reason to believe it can survive to see that long term. With a large dividend that had been growing before the pandemic, retirees can get a decent income stream with the potential to increase, as well.

That combination adds up to a company that has a very good shot of being a dream stock for retirees. For the sake of portfolio diversification, it certainly shouldn't be the only stock in any retiree's portfolio. Still, it's worth considering for a slot in the equity portion of a retirement portfolio to help savvy retirees attempt to fight the long run ravages of inflation.

Chuck Saletta has the following options: long January 2023 $35 calls on Omega Healthcare Investors, short January 2023 $35 puts on Omega Healthcare Investors, short June 2021 $35 puts on Omega Healthcare Investors, and short June 2021 $45 calls on Omega Healthcare Investors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Omega Healthcare Investors, Inc. Stock Quote
Omega Healthcare Investors, Inc.
$32.90 (2.85%) $0.91

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