HCP Spinoff – Is the Dividend Safe?

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Overall, everything is looking good for HCP outside of the potential issues with the HCP Spinoff. They released earnings a few days ago and in a nutshell:

  • Q1 adjusted FFO of $321.8M or $0.69 per share vs. $364.3M and $0.79 one year ago.
  • FAD of $0.66 vs. $0.69.
  • Dividend is $0.575.

Portfolio wise, since I purchased them, it had equity growth over 12% and 2 dividend payouts of $35The dividend yield is over 6.5%,  so everything seems to be good. So what’s with the post? Well the surprise announcement that they are spinning off part of their portfolio in a new, publicly-traded REIT(SpinCo).

HCP Spinoff

HCP announced the intention to spin off its HCR ManorCare (HCRMC) real estate portfolio in a new, publicly-traded REIT(SpinCo). 

Financially, we’re seeing a drop of income for HCP of 26% from 1.9Bn to 1.4Bn. So right away, that’s a healthy chunk of money being taken out. Owners of HCP stock will continue to have the same amount of shares and will be given shares in the new SpinCo stock as a tax-free return. No word yet on whether or not the new stock will have a dividend. 

hcp spinoff split dividend
http://ir.hcpi.com/download/Proposed+Spin-Off+Presentation.pdf

 

If I were to make some guesses, I would assume the HCP and HCP Spinoff: SpinCo dividend will be recalculated based off the split. So HCP dividend will but lowered and in effect, the stock will decrease in price to compensate. The ideal decrease is to keep the dividend yield the same for HCP. From the Conference Call transcripts, management restated that they remain focused on dividend growth for HCP; so that’s a good sign. But they did not have any real answers on SpinCo’s dividend and that it will be decided by the board. You can read the entire earning call transcript here.

The rules of Dividend Noob are pretty simple.

  1. Preserve Equity : Nobody wants to lose money and with the stock split, there is a good chance we’ll see the price of the stock go down. But what about the shares in the new company as the offset? It’s a big unknown right now and I’m not in the game of gambling. I’ve had a healthy return of 12% on equity, as well as dividend payouts on HCP. Getting out might be the correct call until things stabilize with HCP.
  2. Dividend Growth: I want the dividend to be stable and to ideally go up each year. More income on the exact same equity invested is great. It’s even more free money! HCP has been great in dividend growth. They are a Dividend Aristocrat.
  3. Stock Growth: It’s why everybody wants to play the big game of stocks. The fact we invest money in hopes that it will be worth even more in the future is the whole reason!

So with the unknown in the forecast, I have decided to sell my shares of HCP.

Will You Get back Into HCP?

Once the smoke has settled on the spin off, I’ll re-evaluate and decide from there. I’m not opposed to it, since HCP is obviously a great company with an outstanding track record in dividend payout. They are a Dividend Aristocrat for a reason!

Where Will the Money Go From HCP?

No idea right now. There’s a few stocks that I have my eye on but the overall market sentiment is pretty bearish. There’s a ton of better dividend blogs talking about just stockpiling cash reserves for the time being. Maybe its something I should do? I’ll have to figure it out as I go. They don’t call me the Noob for nothing.

Disclaimer: I have owned and sold HCP within the last few days. My opinions about the HCP Spinoff are my own.

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