W. P. Carey stock (NYSE:WPC) has been hammered year-to-date, leading to its dividend yield advancing to a substantial 7.9%. The REIT, which owns 1,475 net lease properties (office, retail, industrial) and 100 operating properties (including hotels and self-storage sites), has seen its shares decline by 27.6% during this period. In fact, at $54, the stock is trading at the same levels it did all the way back in 2012. Despite that, the dividend appears well-covered, and the high yield is attractive. Thus, I am bullish on WPC stock.
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Why Has W. P. Carey Stock Fallen Recently?
W. P. Carey’s stock steep stock decline in recent months can be attributed to several reasons, all of which, however, are directly tied to the current macroeconomic environment.
The main factor dissuading investors, in my view, is the tough challenge the company currently confronts in executing its growth strategy. As I mentioned, W. P. Carey currently owns 1,475 net lease properties, spanning industrial, retail, and office spaces, along with 100 operating properties—85 in self-storage, 13 hotels, and two student housing units.
Notably, a decade ago (Q2 2013), the company managed a portfolio of 1,018 properties with only 423 representing ownership (the rest were just managed with some partial interest involved). Its growth strategy has transformed the company’s ownership structure and notably boosted its asset base during this period.
W. P. Carey’s property portfolio expansion unfolded during a period marked by predominantly low interest rates. This enabled management to identify accretive opportunities across various property types and subsequently increase its funds from operations per share (FFO/share) over time.
Specifically, the company’s adjusted FFO/share exhibited a gradual increase from $4.29 in Fiscal 2013 to $5.29 last year. Given the reasonable levels of the cost of debt (interest expenses) and cost of equity (dividends, from WPC’s perspective), the company could generate a nice profit margin when deploying cash raised through debt or equity.
However, this landscape has now changed drastically. Over the past year, interest rates have surged, rendering potential acquisitions considerably more expensive. Concurrently, certain asset classes that once presented attractive opportunities for the company now lack their former allure.
As you may have read in the news, commercial properties continue to grapple with challenges in achieving satisfactory occupancy levels, persisting even in a post-pandemic era. Furthermore, concerns about a potential downturn in consumer discretionary spending have exerted pressure on rent growth in retail properties.
W. P. Carey’s reduced growth prospects and an increase in investors’ required returns due to rising rates explain the stock’s 7.9% yield. The rationale behind investors valuing the stock with minimal growth expectations is evident, as the majority of anticipated future returns are attributed to the hefty dividend.
It’s important to note, however, that the 7.9% yield does not necessarily signal any vulnerability in the safety of payouts. Despite concerns some investors might harbor, assuming that such a high yield implies the market foresees a potential dividend cut, I believe this is hardly the case.
How Safe is WPC’s 7.9% Dividend Yield?
W. P. Carey’s 7.9%-yielding dividend appears to be on solid ground. Sure, the company faces troubles when it comes to executing its growth strategy in the current market. Further, WPC is set to be hit with higher interest expenses this year and in the years to follow as this situation persists. Still, these factors shouldn’t impact its dividend coverage notably.
To illustrate this, management expects W. P. Carey’s AFFO/share to land between $5.32 and $5.38 in Fiscal 2023. In fact, the midpoint of $5.35 even implies growth compared to last year’s figure of $5.29. Yes, its interest expenses have grown notably lately, surging by 62.7% year-over-year in Q2. However, the modest revenue growth, disciplined spending, and reduced stock-based compensation have ensured that the bottom line remains mostly intact.
Besides the midpoint of management’s guidance pointing to an acceptable forward payout ratio of 80%, investors can probably feel more secure about W. P. Carey’s dividend based on the company’s exceptional track record. Specifically, WPC boasts 28 years of consecutive annual dividend increases.
For context, there are only six U.S.-based REITs boasting more than 25 years of dividend growth, which highlights the company’s qualities and ability to remain resilient through some of the worst economic environments of the past two decades.
Is WPC Stock a Buy, According to Analysts?
Turning to Wall Street, W. P. Carey has a Moderate Buy consensus rating based on three Buys, three Holds, and one Sell assigned in the past three months. At $68.00, the average WPC stock forecast implies 25.6% upside potential.
The Takeaway
In conclusion, despite W. P. Carey’s recent stock decline (attributed to challenging growth prospects and rising interest rates), its 7.9% dividend yield appears secure. While the market expects minimal growth from WPC, the company’s solid track record, disciplined spending, and expected AFFO/share growth in 2023 support confidence in dividend stability.
With 28 consecutive years of dividend increases, the company also demonstrates resilience, making it an appealing option for income-oriented investors seeking high yields they can rely upon.
