Shares of W.P. Carey (WPC -0.48%) gained 16% last year. Stacked up against the 27% gains that the S&P 500 index produced in 2021, it did reasonably well since it is a less-volatile stock. This makes W.P. Carey more defensive than the broader market during corrections, which makes up for its underperformance during bull markets.
But with such strong stock appreciation last year, should income investors buy the real estate investment trust (REIT) now or wait for a pullback? Let's dig into the stock's fundamentals and valuation to answer that question.
Bouncing back from the pandemic
W.P. Carey delivered robust operating results through the first three quarters of 2021.
During that period, total revenue of $956.6 million represents 6.1% growth over the year-ago period. More important, this represents a 3.8% growth rate over the pre-pandemic period in 2019. How was W.P. Carey able to generate revenue growth in the first nine months of 2021?
First off, it increased its property count from 1,204 in the third quarter of 2019 to 1,264 properties as of the third quarter of 2021. Second, the economic recovery helped the company's rent-collection rate reach more than 99.5% in the third quarter.
W.P. Carey's higher property count and the ongoing economic recovery from interruptions to business earlier in the pandemic helped the company's adjusted funds from operations (AFFO) per share rebound to pre-pandemic levels. W.P. Carey's $3.73 in AFFO per share through the first three quarters of 2021 works out to a 5.4% growth rate from the year-ago period. And compared to the pre-pandemic 2019 period, year-to-date AFFO per share is up 0.3%. This suggests that the company has fully recovered from the pandemic shutdown.
W.P. Carey's decent year-to-date results explain why it maintained its midpoint AFFO-per-share forecast of $4.98 for full-year 2021. This would equate to a 5.1% growth rate over the $4.74 in AFFO per share reported in 2020. And against the $5 in AFFO per share for 2019, this represents just a 0.4% decline.
While W.P Carey hasn't yet released a forecast for 2022, it's worth noting that the company did invest a record $1.73 billion in 2021. Thanks to the company's huge addressable market in the U.S. and Europe, it's reasonable to conclude that significant acquisitions will continue in 2022. In my estimate, this should drive mid-single-digit growth in AFFO per share annually for the foreseeable future.
A manageable dividend payout ratio
W.P. Carey appears to be healthy fundamentally. But given that its 5.3% dividend yield is approximately quadruple that of the S&P 500's 1.3%, it's worth asking the following question: Is W.P. Carey's payout safe?
It paid out approximately $4.20 in dividends per share in 2021 against its midpoint AFFO-per-share projection of $4.98, which comes out to an 84.3% payout ratio. This is relatively close to the 79.2% dividend payout ratio that Realty Income (O 0.03%) will have for 2021 at the $3.58 midpoint of its AFFO-per-share projection for the year.
W.P. Carey's AFFO-per-share payout ratio gives the company room to withstand a temporary decline in its profitability if another COVID variant prompts a partial lockdown. The payout ratio also allows it to retain the AFFO necessary to continue funding acquisitions to expand. Thus, W.P. Carey remains positioned to become a Dividend Aristocrat -- those S&P 500 companies that have increased dividends for at least 25 years straight -- by March of 2023.
The valuation could make it a buy
W.P. Carey has shown itself to be a high-quality dividend growth stock. But there is no stock that is always a buy. That's why we need to look at the company's valuation.
W.P. Carey is trading at an AFFO valuation multiple of 16.1 for 2021, whereas Realty Income is priced at a 19.9 multiple. Realty Income arguably deserves a higher valuation because it increased its AFFO per share slightly in 2020, while W.P. Carey's AFFO per share contracted slightly.
But I would argue that the gap in valuations between the two REITs is a bit too much, which should leave some room for valuation-multiple expansion for W.P. Carey. Pairing potential upside in W.P. Carey's $79 share price with its high yield makes it a buy for income investors.