Normally, investors are forced to choose between growth and yield. A high-growth stock will plow all of its earnings back into the business, in an effort to make itself bigger. Sure, dividends could be paid, but they’re often an afterthought. The best opportunity is to reinvest into the business, not paying shareholders.
The exact opposite thing happens with most high yielders. They’re mature businesses without much growth potential. As there’s no opportunity to reinvest into the business, excess profits are simply paid back to shareholders.
Every now and again a stock comes along that offers investors a nice combination of growth and yield. I’d like to highlight one today, a company with seemingly endless expansion potential along with a 10.1% distribution.
No, that’s not a typo.
Let’s take a closer look at this unique opportunity.
Invesque Inc. (TSX:IVQ.U) is the owner of 125 different health care properties, spread between 20 U.S. states and 2 Canadian provinces. The bulk of its portfolio is invested in seniors’ housing — including assisted living and memory care centers — as well as owning skilled nursing facilities and a smattering of medical office facilities.
The company has been a growth-by-acquisition story for years now, consolidating the incredibly fragmented medical real estate market. In early 2016, the company owned just 11 properties worth approximately US$300 million. After its latest acquisition — a US$340 million transaction for 20 buildings representing 1,440 beds — the company now controls nearly US$2 billion in assets.
There’s still plenty of growth potential after this, too. There are hundreds of properties that can be acquired in North America, either individually or as part of larger acquisitions. And there’s also potential to develop new property, which will need to happen as millions of Baby Boomers age.
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Why today is a good opportunity
Invesque shares are trading at an attractive valuation today, which makes it a good time to buy. The stock is down approximately 15% over the last year.
A few factors have driven the price down lately. Some investors are concerned with the amount of debt the company has on its balance sheet, especially after the latest acquisition. There’s also some pressure in the sector in general, as investors worry about too much supply in the seniors living market. And a strengthening Canadian Dollar likely isn’t helping Invesque shares either, which trade in U.S. dollars despite their presence on the Toronto Stock Exchange.
Invesque stocks currently trades hands at US$7.29 each at writing. In 2018, the company earned US$0.74 per share in adjusted funds from operations, putting us at a price-to-adjusted funds from operations ratio of less than 10 times, which is quite cheap.
Adjusted funds from operations should increase in 2019 for a couple of reasons. 2018’s results were weighed down by a new lease on one property that is specifically designed to pay less income at first before adjusting to a normal yield. And the company spent cash on due diligence for potential acquisitions — deals that ultimately didn’t happen. The latest acquisitions should also increase the bottom line.
Invesque is also quite cheap on a price-to-book value ratio, with the value of shares checking in at approximately 80% of the company’s net asset value.
Finally, we have the dividend yield. Shares currently pay out an eye-popping 10.1% dividend. The distribution is sustainable too, with a payout ratio in the 80% range.
The bottom line
Invesque gives investors the opportunity to get paid a very generous yield while participating in one of the best growth opportunities available in the market today. It isn’t very often an opportunity like this comes around.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no position in any of the stocks mentioned.