HomeMost PopularW. P. Carey: Implications of a Management Decision

W. P. Carey: Implications of a Management Decision

Actionable Trade Ideas

always free

Strategy of diversified investment.

When it comes to investing, diversification is a key strategy that cannot be emphasized enough. We often recommend holding investments in at least 42 different securities, a concept that can be met with resistance. Many individuals argue that owning over 40 investments is excessive and unnecessary, preferring to invest in fewer, supposedly high-quality stocks.

However, as investors, we must acknowledge that we are always operating without the most critical piece of information – the ability to predict the future. Despite our best efforts, we cannot foresee what will happen in the markets or how individual companies will perform.

One stock that had long been considered a stable and reliable investment was W. P. Carey Inc. (NYSE:WPC), a dividend stock with a reputation for raising its dividend consistently for over 25 years. WPC had weathered two recessions and the COVID pandemic while maintaining its dividend payout. In our model portfolio, it was among the lower-yielding options.

However, a recent strategic change announced by WPC management has introduced significant uncertainty. The company has decided to spin off its office assets, similar to Realty Income’s (O) approach with Orion Office REIT (ONL). WPC shareholders who continue to hold their shares will receive shares in the newly formed Net Lease Office Properties (NLOP). Unlike ONL, which plans to pay dividends and expand its portfolio, NLOP intends to sell off the assets and distribute the proceeds to shareholders.

While WPC believes this strategy will lead to a higher valuation and greater long-term returns, it also poses execution risks. Furthermore, the dividend will be β€œreset” at a lower level. Consequently, WPC’s yield will no longer meet our income-based strategy requirements, warranting a sell alert.

The Strategy Behind the Decision

WPC aims to operate with a smaller portfolio of office properties, expected to enhance its funds from operations (FFO) multiple. The company also plans to lower its dividend payout ratio from over 80% to 70-75% of adjusted FFO (AFFO). This adjustment accounts for the loss of cash flow-positive office properties due to the spin-off.

Retaining more cash will enable WPC to access cheaper capital and be more aggressive with acquisitions. Management anticipates that a focused portfolio clear of the out-of-favor office sector will result in a higher valuation and faster growth. When the strategic shift stabilizes, dividend growth is expected to resume, potentially at a faster pace than before.

However, we question whether WPC’s management fully comprehends the long-term impact of cutting dividends on the company’s valuation. A dividend cut can significantly reduce a company’s ability to issue shares at attractive prices. WPC’s history of maintaining a dividend streak of over 25 years made it a unique proposition for many shareholders. Now, with an uncertain future, other higher-yielding options may be more appealing.

To Hold or To Sell?

The decision to hold or sell WPC comes with important considerations. Holding onto WPC shares means receiving shares in the spin-off company, NLOP, and potentially earning dividends as NLOP sells off properties. However, these dividends are subject to management expenses and debt repayment priorities.

WPC’s reduced dividend, as a result of the strategic shift, may hinder its ability to attract dividend-growth-style investors. Nonetheless, for those with a long-term outlook of 10+ years, holding WPC could yield positive results. Negative sentiment resulting from the dividend cut may take time to dissipate.

For us, WPC’s yield was already borderline. With the dividend cut, it no longer aligns with our objectives. Following the spin-off, reconsidering WPC or NLOP based on price and dividend prospects might be worthwhile.

Conclusion

This situation serves as a crucial reminder of the significance of diversification and avoiding excessive concentration in a few perceived β€œbest” or β€œsafest” companies. A lower yield does not guarantee dividend safety. WPC, a once-promising dividend stock, no longer fits our goals due to management’s decision. Fortunately, for those following the Income Method, WPC represents just one of many income streams, and its lower-than-average yield can easily be replaced with other attractively priced investments. The damage to income investors is primarily psychological rather than financial.

While WPC’s management may have made a questionable decision that will take years to recover from, our income continues to increase. We have sold WPC and reinvested in other high-dividend opportunities.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.