This article suggests a valuation method based on book value and dividend to value well-established businesses as an asset plus income purchase.
The method relies on two of the most easily obtainable data with the least amount of ambiguity, and using a few reliable data points is often better than using many.
This valuation method suggests that W. P. Carey is attractively valued at its current price, offering a solid opportunity to buy a quality business under today’s overall expensive market.
CHUNYIP WONG/E+ via Getty Images Investment thesis and background
My last article analyzed the long-term prospects of W. P. Carey (NYSE: WPC ). A cost of capital analysis was used to show that the business sustainably earns a healthy return on capital invested, demonstrating its long-term profitability and stable moat. And the thesis was that it represents a quality REIT business that is slightly overvalued under current prices, and the price has indeed retreated by about 7% since my last writing.
This article describes an alternative valuation method based on book value (“BV”) and dividend to value well-established businesses as an asset plus income purchase. The method is based on a multiple of BV plus 10 x dividend to estimate the investment value of a stock. The method relies on two of the most easily obtainable data with the least amount of ambiguity. In investing, I always prefer the use of a few data points that are reliable than many data points that are less reliable. The valuation method essentially approaches the valuation of stock as a 10-year bond (or an equity bond). The value of a bond should be the sum of its face value plus the coupon payments. And in this method, the BV is taken to be face value, and the dividend taken to be the coupons. The best stock investment should be like a bond.
This method applies to many types of stocks as to be elaborated later. But it is especially intuitive to REIT stocks. If you think like a long-term business owner (instead of a stock trader), then investing in REIT is nothing more than buying a piece of real estate property to collect rent. So the investment value consists of two parts: the value of the property itself and the future rent. This valuation method approximates the first part by the BV and the second part by 10 x dividend.
The rest of this article details the application of this method on W. P. Carey. And the results suggest that it is attractively valued at its current price. Given the quality of the business and today’s overall expensive market, it is a good investment opportunity for a range of investing styles. The businesses – overview and recap
Most of the detailed operation, profitability, and valuation information of the stock has been provided in my earlier article and won’t be repeated here. This section provides a very brief recap of my last article to facilitate the new discussions.
WPC is a global REIT that invests in commercial properties. The business has a long history (45+ years) of working with different companies to monetize the value in their real estate. As seen from the next chart, WPC holds a large and diversified portfolio of high-quality real estate totaling 146 M square feet. The company boasts an occupation rate of more than 90% and an annualized base rent of $1.2 billion. Also note that more than 99% of the leases have an escalation built in. With the current inflationary prospects, this will serve as a good hedge should inflation persist longer and higher.
Through property investments and long-term tenant partnerships, WPC has been delivering stable income to investors. WPC investors have been handsomely rewarded in the past decade through a combination of earnings growth, valuation expansion. The stock delivered 240% of total return over the past decade, compares very favorably to that delivered from the SP500 index. The Asset + Income Valuation approach
The method calculates the investment value (“IV”) of a stock based on the following formula:
IV = M x BV + 10 x dividend
where M is a multiplier for the BV. This valuation method essentially values a mature stock like a 10-year bond if you consider the BV as the face value of the bond and the dividend as the coupon payment. This method offers the advantage of valuation anchored in the most easily obtainable data with the least amount of uncertainty: BV and dividend. The multiplier, M, is a factor to adjust for the return […]