Everyone wants to invest like Warren Buffett. He’s basically the Michael Jordan of investing.
Sure, Buffett put up some gaudier numbers when he was younger, as did Jordan, but he’s still on the Mount Rushmore of all-time investors.
But what if you could invest better than Buffett?
That’s the opportunity you might have in front of you right now.
I want to highlight STORE Capital (STOR).
This is a high-quality REIT that owns over 2,500 properties. These properties are leased out to over 470 different tenants in over 100 different industries ranging from fitness to fast food. Their occupancy rate is consistently over 99%, which gives them some cushion in the current pandemic situation.
They have a 30-year track record of success, and they’ve increased their sizable dividend every year since going public in 2014.
That dividend is, indeed, sizable: STOR yields 7.55% today.
Plus, STORE Capital most recently handed out a 6% dividend increase, which is in line with their long-term trend. The REIT has increased its dividend by a total of 40% since its IPO.
This all sounds pretty attractive.
That’s probably why Warren Buffett became enticed.
Through a private placement in 2017, Berkshire Hathaway Inc. (BRK.B) took a 9.8% stake (at the time) in STORE Capital.
STORE Capital issued 18.6 million shares to a Berkshire Hathaway subsidiary at a price of $20.25 per share.
The stock was off to the races after that point, reaching an all-time high of $40.96 this past fall.
Then the pandemic cratered this stock, along with most other stocks.
STORE Capital’s stock is now trading hands for under $19/share.
That means you can get in cheaper than Buffett did.
Actually, it’s an even better deal than it appears to be.
That’s because STORE Capital is a bigger, and arguably better, company than it was when Buffett bought in.
Intrinsic value has increased, while the price has decreased.
The property portfolio has grown and become more diversified. It earns more FFO/share. And the dividend is much bigger today than it was in 2017.
It’s simply a bigger and better company at a much cheaper price than it was before. And it wasn’t a bad deal before, as evidenced by Buffett’s move.
STORE Capital CEO Christopher Volk penned a thoughtful letter to shareholders on March 17, 2020, describing the situation of the company amid the current pandemic. This paragraph in particular is important:
As I write this letter to you, our share price is being dragged down with the broader markets and now is only slightly in excess of where it stood at our November 2014 initial public offering. Per the earlier paragraph, our AFFO per share back then was actually 43% less, our dividend was 40% less, our dividend was less protected, we had a single BBB- corporate rating (we are now rated BBB from three rating agencies), we had 947 properties (we had 2,504 as of the end of 2019) and we had 50 employees (we now have a team of 97 incredible people). Quantitatively and qualitatively, STORE is a far better company today than when we introduced it to the public in 2014. I would also note that the Ten-Year Treasury note yield over our more than five years as a public company has ranged from roughly 1.5% to just over 3%, while we have produced double digit rates of return for our stockholders each year. Currently, the Ten-Year note is under 0.8%.
The company earned 1.99 in AFFO/share for FY 2019.
Meanwhile, the stock is under $19/share.
That means the P/AFFO ratio is well under 10.
That’s an incredibly low valuation for a high-quality REIT that counts Berkshire Hathaway as one of its largest shareholders.
I’m a very happy shareholder in this wonderful business. And I’ve been recently adding shares in STOR to my FIRE Fund.
The stock is down ~50% YTD. But it’s not like 50% of its tenants can’t pay the rent from now until oblivion. 50% of the properties aren’t suddenly being demolished.
Speaking on the quality of the contracts, Volk added this:
While it’s still early and no one can predict the ultimate outcome of this pandemic, as of today we have received just a handful of calls representing well below 0.5% of rents from tenants stating that the COVID-19 pandemic will have a potential impact on their ability to meet their contractual obligations to us. Note that the heading of this paragraph is “Contract Quality” and not “Tenant Health.” We have always been careful to draw a distinction between tenant credit quality and investment contract quality. Because we own profit center assets, with 92% of our multi-unit tenant investments bound by master leases, our contracts tend to be senior to other tenant payment obligations. In fact, at an approximate 2:1 rent coverage after overhead, we estimate that our average contract can tolerate an approximate 40% revenue reduction and still meet its rent obligations.
This is why it’s great to be a long-term dividend growth investor.
It’s always great to be a long-term dividend growth investor, of course.
But it’s especially great right now.
You’re able to see short-term volatility as a long-term opportunity and pick up high-quality stocks when Mr. Market is being irrational and emotional. This is exactly how you make money over the long run.
Adding further color to the dividend safety and overall liquidity, I recommend you watch Mr. Volk’s interview with CNBC from April 14, 2020:
It’s around the 2:00 mark that Mr. Volk describes the fact that they’re sitting on cash worth three times their combined operating and interest costs from all of last year.
I’ll also add that the dividend payout ratio is around 70%, which is quite comfortable for a REIT. Adding further reinforcement, a REIT is required by law to pay out at least 90% of its net income in the form of a dividend. And STORE Capital is a very profitable enterprise.
Even if, in a worst-case scenario, STORE Capital did have to cut their dividend, keep in mind that they were paying $0.31 per share in dividends in the summer of 2017 (when Buffett bought in). The dividend is currently at $0.35 per share. So even a 10%+ dividend cut (which seems unlikely) would get you right back to where Buffett was, but you’re still getting a better overall deal here.
This is a very interesting long-term opportunity for dividend growth investors.
I was buying as the stock fell below $15, but I think it remains compelling at under $19 here.
This price is better than Buffett’s deal. But in terms of value, it’s much better than what Berkshire got.
You don’t need to have access to a private placement, have billions of dollars, or be on the Mount Rushmore of investors to see this for yourself and take advantage.
Full disclosure: I’m long STOR.
What do you think? Does this look like a chance to get a better deal than Buffett?
Thanks for reading.
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