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Equity Residential: This 3% Yielder Has Strong Dividend Growth Potential

Published Tue, 30 Apr 2019 11:00:42 on Income Investors

1 Dividend Growth Stock to Think About
In this day and age, a dividend yield of three percent may not seem like much. But if a three-percent yielder can consistently grow its payout, investors who hold on to their shares may collect much higher yield-on-cost in the long run than what the current numbers suggest.
With that in mind, let’s check out Equity Residential (NYSE: EQR).
Headquartered in Chicago, Illinois, Equity Residential is a real estate investment trust (REIT) that specializes in apartment properties. The company acquires, develops, and manages rental apartment buildings located in urban and high-density suburban markets.
As of December 31, 2018, Equity Residential’s portfolio consisted of 307 properties totaling 79,482 apartment units. These properties are located primarily in New York, Boston, Seattle, Washington D.C., San Francisco, Southern California, and Denver. (Source: “Investor Update,” Equity Residential, last accessed April 23, 2019.)
By being a landlord to tens of thousands of residential tenants, the company can generate a predictable stream of cash flow. And because Equity Residential is a REIT, it must return most of its profits to shareholders through regular dividend payments.
Right now, the company has a quarterly dividend rate of $0.5675 per share, which comes out to an annual yield of three percent.
Like I said, EQR stock’s current yield is not a wow factor in and of itself. The number-one reason for income investors to put this REIT on the radar is the growth potential of its cash payouts.
Consider this: in 2010, Equity Residential paid total dividends of $1.47 per share. In 2018, it paid a whopping $2.16 per share, translating to a compound annual growth rate (CAGR) of 4.9%. (Source: “Dividends,” Equity Residential, last accessed April 23, 2019.)
The best part is, based on what the company has been doing lately, it should have no problem continuing that track record.
Equity Residential: More Dividend Hikes to Come?
As is the case with most REITs, the key performance metric at Equity Residential is funds from operations (FFO). By comparing a REIT’s FFO to its dividends paid for a given reporting period, investors can see whether it generated enough cash to cover its payout.
In 2018, Equity Residential generated FFO of $3.14 per share. Its normalized funds from operations, which excludes certain special items, totaled $3.25 per share for the year. Whichever metric you use, it’s obvious that the amount easily covered its total dividend payment of $2.16 per share for 2018. (Source: “Equity Residential Reports Full Year 2018 Results,” Equity Residential, January 29, 2019.)
The business is also growing. In 2018, Equity Residential’s same-store revenue grew 2.6% from 2017, while its same-store net operating income increased by 1.7%. This was driven by the company earning higher rents than what was previously paid for the same space. In 2018, the company’s same-store average rental rate increased two percent.
The company boasts strong occupancy rates, too. In 2018, Equity Residential’s portfolio achieved 96.2% in physical occupancy.
Compared to other apartment REITs, EQR also stands out in terms of operating efficiency. The company’s overhead costs were 5.7% of its total revenue last year. Looking at its peer group, which includes Apartment Investment and Management Co (NYSE: AIV), AvalonBay Communities Inc (NYSE: AVB), Camden Property Trust (NYSE: CPT), Essex Property Trust Inc (NYSE: ESS), Mid-America Apartment Communities Inc (NYSE: MAA), and UDR, Inc. (NYSE: UDR), we see that these companies have an average overhead cost as a percentage of total revenue of 6.4%. (Source: Equity Residential, op cit.)
And the best could be yet to come. For 2019, management expects Equity Residential’s same-store revenue to increase by another 2.2% to 3.2%. This would be driven by an expected renewal rate growth of 4.9% and an expected occupancy rate of 96.2%. Moreover, the company is projected to earn normalized funds from operations of $3.34 per share to $3.44 per share for full-year 2019. At the midpoint of the guidance range, that would represent a 4.3% increase from the $3.25 per share in normalized funds from operations earned in 2018.
Also, Equity Residential is on track to pay total dividends of $2.27 per share in 2019, 5.1% more than last year. If the company achieves the midpoint of its guidance range in normalized funds from operations, it would have a payout ratio of 67%, leaving plenty of room for future dividend hikes.
The Bottom Line on Equity Residential Stock
Add it up and you’ll see that Equity Residential represents a solid income opportunity. The company runs a stable business model and generates increasing financials from its real estate portfolio. Management has been raising the dividend at an impressive pace and will likely continue to do so given their solid business. For investors seeking dividend growth, EQR stock is one of the top names to think about.
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Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
APARTMENT INVESTMENT & MANAGEMENT 51.11   8.5 6.03 1.56 3.07
MID-AMERICA APARTMENT COMMUNITIES 128.66   62.2 2.07 3.84 3.00
CAMDEN PROPERTY TRUST 108.97   66.4 1.64 3.20 2.91
AVALONBAY COMMUNITIES 209.53   31.6 6.62 6.08 2.89
UDR 48.03   84.3 0.57 1.37 2.86
EQUITY RESIDENTIAL 85.36   42.7 2.00 2.27 2.69
ESSEX PROPERTY TRUST 324.02   52.2 6.21 7.80 2.43

APARTMENT INVESTMENT & MANAGEMENT - AIV
APARTMENT INVESTMENT & MANAGEMENT - AIV  


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