Investors often focus on REITs and Dividend Aristocrats, particularly when high-yield offerings or reputable stocks nearing a 52-week low come into play.
With an impressive yield of nearly 8% and a portfolio heavily weighted by long-term leases, the REIT highlighted in this article captures attention.
Similarly, the Dividend Aristocrat reviewed in this piece presents an alluring profile. Historically, the collective performance of Aristocrats has outshined the broader market, offering steadfast dividends and potential opportunities near a 52-week low.
However, recent developments have provoked divergent actions in my investment approach. While I chose to overlook one of these options, I was prompted to initiate a position in the other.
Evaluating Easterly Government Properties
Named for its focus, Easterly Government Properties (NYSE:DEA) is an office REIT specializing in Class A properties primarily leased to the U.S. Government. With 90 properties in its portfolio, the REIT leases to 40 government agencies, emphasizing mission-critical government-leased assets.
DEA’s top three tenants are the Veterans Administration, the FBI, and the Drug Enforcement Agency.
Analysts highlight several strong positives while evaluating DEA as a potential investment: 99% of its lease income is bolstered by the full faith and credit of the U.S. Government, and as of the last quarter, 97.5% of DEA’s properties were leased with an average term of 10.4 years, ensuring a steady and predictable revenue stream.
Furthermore, the company maintains a manageable debt load. Last quarter, DEA repaid all borrowings under its $450 million revolver credit line, while carrying no floating rate debt on its balance sheet in the current high interest rate environment. This financial prudence was recently underscored when the Kroll Bond Rating Agency rated DEA’s credit as BBB/stable.
Despite these favorable aspects, challenges lurk. While DEA benefits from its unique asset holdings, this positioning poses a double-edged sword. For example, properties like the one described in the recent earnings report are ill-suited for the majority of prospective tenants, granting the federal government significant leverage during lease renegotiations.
Moreover, the work-from-home trend represents a potential headwind for DEA, introducing further complexities into the investment decision.
However, my primary concerns extend beyond these challenges. In the quarter following its 2015 IPO, the REIT paid a dividend of $0.21 per quarter. Nearly a decade later, the dividend has only marginally grown to $0.265 per quarter, reflecting a lackluster growth rate. Furthermore, the dividend has remained unchanged since mid-August 2021.
While the current yield sits at an enticing 7.86%, the 5-year dividend growth rate wallows at a meager 0.38%. As an investor drawn to robust yields, I advocate for a minimum low single-digit annual dividend growth rate to capture my interest.
Even more disconcerting are the responses regarding the dividend during the last earnings call. When posed with questions about the elevated payout ratio and the future trajectory of the dividend, management’s answers lacked assurance and transparency, leaving significant doubts regarding the company’s dividend policy and forward planning.
This departure from the conventional “cheerleading” of dividends during earnings calls raises concerns in my assessment. While it’s not conclusive evidence of DEA’s dividend under distress, it certainly raises troubling questions that beg further scrutiny.
Thus, in light of these developments,
Air Products vs. DEA: A Tale of Two Stocks
Since 2016, the Real Estate Investment Trust (REIT) in question has shown a negative Adjusted Funds From Operations (AFFO) growth rate, and analysts forecast a continued downward trend with a consensus growth rate over the next two years of -1.59%.
This has led to concerns over its dividend payouts, with a dividend payout ratio of over 320% and an AFFO payout ratio of just over 113%, signaling a possible dividend cut.
On the other hand, Air Products and Chemicals (APD) has positioned itself as a stalwart in the industrial gases sector, with a robust history of dividend growth and a positive outlook for future expansion.
Air Products and Chemicals: The Industrial Gases Powerhouse
Boasting a presence in 50 countries with 750 production facilities, Air Products and Chemicals (NYSE:APD) holds a critical role in over 30 industries, providing essential gases such as oxygen, nitrogen, and argon, as well as various process gases.
Industries ranging from Aerospace, Automotive, and Pharmaceuticals to Power, Pulp, and Water and Wastewater, are all heavily reliant on APD’s products, underpinning its importance in the global industrial supply chain.
Furthermore, APD’s strategic approach to customer retention, with approximately 50% of its revenue derived from customers’ on-site production facilities, creates significant barriers for competitors looking to infiltrate its market share.
This formidable position is underpinned by the company’s leadership in the hydrogen market, with substantial investments in hydrogen megaprojects and a projected market growth rate of 10.2% over the next five years.
Coupled with a strong record of dividend growth, APD displays stability and growth potential, contrasting sharply with the concerns surrounding the REIT’s future prospects.
Financial Standing and Outlook
Looking at the financials, Air Products and Chemicals presents a compelling case, with a current dividend yield of 2.65% and a payout ratio of just under 60%, indicative of a sustainable dividend with room for growth.
Moreover, the company’s debt is well-rated by Moody’s and Standard & Poor’s, providing further testament to its financial foundation.
In contrast, the REIT’s financial metrics paint a concerning picture, with negative AFFO growth and unsustainable dividend payout ratios, leading to a potential dividend cut or stagnation in growth.
Investor Sentiment and Conclusion
Given the disparity in performance and outlook between the two companies, it’s evident that Air Products and Chemicals stands as a more promising investment. With a history of stability, growth potential, and a strategic position in the industrial gases market, APD offers investors a compelling opportunity.
In light of the contrasting trajectories, it’s prudent for investors to carefully consider the long-term implications of their investment choices and recognize the potential risks associated with the REIT in question.
Ultimately, the tale of these two stocks presents a clear dichotomy – one marked by uncertainty and potential decline, and the other characterized by resilience and growth prospects. It’s a reminder that in the world of investing, not all stocks are created equal, and careful discernment is essential in navigating the financial markets.
