I’m a big believer in loading up your TFSA with what I like to call “one-decision” stocks. These are companies you decide to buy and then never sell. They’re just that good.
Finding these one-decision stocks is no easy matter. You have to analyze all the variables. They need to have good growth prospects while being able to maintain profit margins. The underlying business has to have good return potential. Some investors insist on dividends too, knowing that a stock can sometimes languish for years without moving.
Allow me to present what I think might be Canada’s next great buy-and-hold-forever stock, a relatively small name poised to dominate a lucrative industry.
Enter Chartwell
Chartwell Retirement Residences (TSX:CSH.UN) is Canada’s largest owner of retirement homes and long-term care facilities with more than 31,000 beds spread over 212 communities in Ontario, Quebec, B.C., and Alberta. Chartwell is the leader in each of these provinces despite having a market share of 16%, 8%, 7%, and 12%, respectively.
This reveals an absolutely massive growth opportunity for Chartwell to consolidate this fragmented industry. According to a recent Chartwell investor’s presentation, the top 15 retirement home owners only have a 48% share of the market. Long-term care is even more fragmented; the top 15 operators in that market have a mere 26% market share.
In 2018, Chartwell acquired five residences for a total of $317 million. The consolidation is beginning.
There isn’t just opportunity for Chartwell to acquire existing homes. It also has all sorts of long-term potential to develop new properties. The trend is obvious; Canada will have a huge shortage of retirement residences in 10-15 years if more aren’t brought on the market. There are approximately 2.7 million seniors age 75 and older today. That number is projected to double by 2035.
It has already begun building new units. Chartwell started construction on 1,103 suites in 2018, which should start adding to the bottom line in late 2019 and 2020. It also has 639 suites in the pre-development planning stage.
Investors don’t have to worry about how Chartwell will pay for these new developments, either. With a debt-to-assets ratio of just 41.5%, Chartwell has one of the best balance sheets in the sector.
Recent results
Chartwell has expanded nicely since selling its U.S. portfolio in 2015. Revenue grew from $750 million in 2015 to $877 million in 2017. 2018’s results should show additional growth to surpass $900 million in revenue. Funds from operations grew from $146 million to $182 million in the same time period, with 2018’s results likely coming in close to $200 million.
More recently, Chartwell’s latest quarterly results were a little soft. Occupancy fell from 92.5% to 91.5%, but that was partially offset by increased rents. Funds from operations increased from $50.5 million to $53.3 million but fell slightly from $0.26 to $0.25 on a per-share basis.
Approximately half of Chartwell’s revenue comes from Ontario, which has a lower occupancy rate than its locations in Quebec and out west. The key to the company’s short-term results will be boosting occupancy from 86.5% back up to the 90% range.
Paid to wait
One of the biggest benefits of buying Chartwell today is a growing income stream — a payout well covered by earnings.
The stock currently pays $0.049 per share on a monthly basis, which is good enough for a 4% yield. The distribution has been increased each year since 2014, albeit at a relatively slow pace. The payout was $0.52 per share in 2014; the stock pays $0.588 annually today.
Assuming fourth-quarter results are approximately the same as the first three, Chartwell should generate $0.92 per share in funds from operations while paying out $0.588. That gives it a safe payout ratio of just 64%.
Investors can count on this payout.
The bottom line
Chartwell is an excellent stock that many investors don’t know exists. It has a dominant position in a lucrative sector, great growth potential, solid earnings, a conservative balance sheet, and it pays a generous dividend while investors wait for shares to take the next step. It doesn’t get much better than this, folks.
