Can This 10.4% Dividend Really Be Safe?

Marc Lichtenfeld By Marc Lichtenfeld
Chief Income Strategist

Safety Net

Sabra Health Care REIT (Nasdaq: SBRA) is the landlord for skilled nursing/transitional care facilities, 22 specialty hospitals and 88 senior housing properties. (It also manages 13 more.)

Its assets include

  • Glen Hill Center, a nursing home in Danbury, Connecticut
  • Villa Campana Rehabilitation Hospital in Tucson, Arizona
  • Nexus Specialty Hospital in Spring, Texas, which focuses on rehabilitation after brain injuries.

It’s important to keep in mind that healthcare real estate investment trusts (REITs) make money not by providing healthcare but by collecting rent from the operators. As long as the owners of the hospital or nursing home want to remain in business, they have to pay the rent.

Sabra has a short but impressive history of raising the dividend every year since it began paying one in 2011.

Paying the dividend isn’t a problem. Last year, Sabra paid $1.73 per share in dividends. Adjusted funds from operations (AFFO), a measure of cash flow for REITs, was $2.31, resulting in a payout ratio of 75%.

This year, AFFO is projected by Bloomberg to be flat, so assuming the company’s dividend stays at the current $1.80 per share pace, the dividend is well covered by AFFO.

We’ll want to see AFFO growing in the coming years in order to remain confident that the dividend will be safe. A recent acquisition should boost cash flow, but this year and next will be important in analyzing the company’s progress and dividend safety.

For now, however, there is nothing to be concerned about when it comes to the dividend. It’s a rare case where a double-digit yield is safe.

Dividend Safety Rating: A

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If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section below.

Good investing,

Marc

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