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Bad weather has touched off a surge in food prices.
The 2009 housing crisis is coming home to roost in the form of zooming rents.
And now it looks like Obamacare has lit the fuse on the biggest surge in healthcare inflation in more than three decades.
Healthcare spending rose at a 9.9% pace in the first quarter – the biggest surge in nearly 34 years – as an accelerating economy and the new Obamacare program prompted Americans to spend more on doctor and hospital visits, medical tests and prescriptions, USA Today reported yesterday.
After years of fairly tepid growth, this spike in medical costs is combining with suddenly soaring food prices and rents to create the first "official" inflationary pressures that American households have felt in several years.
And don't expect a respite. Forecasters are saying this big jump in healthcare spending is being driven by deep-seated trends that are here to stay: We'll continue to spend more for the rest of this year – and beyond.
In fact, you can expect escalating medical costs to keep hitting us just like ocean waves pound tropical beaches during hurricane season.
Fortunately, we have a stock in mind that will help offset some of these healthcare pressures. It's a company that plays the longest-lasting healthcare trend of all: The "Graying of America."
The stock has done well – exceptionally well, in fact – since we first told you about it back in 2012. But with the reawakening of healthcare inflation, Wall Street has suddenly "discovered" this stock.
That means we believe the shares have much further to run.
The stock also has a pretty big yield – and a track record of consistent dividend increases.
So even if it treads water for a bit, you'll be compensated handsomely while you wait.
Sounds of Silence
Until recently, it's been quieter than we're used to on the healthcare-costs front.
But now our spending on medical services is spooling up fast.
Indeed, the surge of nearly 10% that we saw in the first three months of this year was the largest since the third quarter of 1980 – and followed a 5.6% increase in final quarter of last year, reports the Bureau of Economic Analysis.
It was so hefty, in fact, that what we spend on healthcare accounted for more than half of the 3% advance in consumer spending, and actually kept the U.S. economy from "going negative." (Economists said U.S. gross domestic product (GDP) rose just 0.1% in the quarter; without all the money we dropped on healthcare, the U.S. economy would've declined by half a percentage point.)
A number of economists are attributing a big chunk of the surge in healthcare spending to the eight million or so U.S. consumers who signed up for Obamacare – officially known as the Affordable Care Act.
And while it remains unclear how many of those folks were previously uninsured, the reality is that the improved economy is inducing a lot of folks to seek the medical services or healthcare insurance they avoided or couldn't afford while they were worried about America's outlook, or were unemployed.
This big jump isn't a one-time thing, either. The Obamacare signup was extended to as late as April 15 (pushing it into the current quarter) for some consumers. So outlays for insurance will surge again. And medical costs will continue to rise as expensive new treatments continue to be unveiled and because fewer drugs are coming "off patent," says a report in USA Today.
"The improved economy could result in individuals having the resources to spend on health care services," American Hospital Association spokeswoman Jennifer Schleman told the newspaper.
Here at Money Map Press, we're all about two things:
- Capitalizing on clear financial and economic trends – which this clearly represents.
- And finding investments that can shield – or at least offset – trends like this that can be financially damaging to your financial future.
And the stock we're going to tell you about today achieves both of those goals.
I'm referring to Omega Healthcare Investors Inc. (NYSE: OHI), a healthcare-focused real-estate investment trust (REIT) with a 5.65% yield and a history of regular dividend increases.
We recommended the Hunt Valley, Md.-based Omega at $23.26 a share back in September 2012. The stock has gained more than 52% since then. It's also paid or declared $3.29 in dividends – boosting the "total return" to 66%.
OHI has increased its dividend in each of the past seven quarters – including a boost just last month. When we recommended the stock, it was yielding 7.14%. But because of the increases, the yield on the original recommendation price is now 9% – illustrating the power of holding this stock long-term.
A Shrewd "Formula"
From the outset, we've liked Omega's strategy.
The REIT invests in income-producing healthcare facilities in the U.S. market – with a special focus on long-term care operations. In other words, OHI provides leases or mortgage financing to operators of skilled nursing facilities (SNFs), assisted living facilities (ALFs), independent living facilities and rehabilitation and acute care facilities.
The target market for Omega is a great one – America's senior citizens, a group that's ballooning in number. The last time I checked, the number of Americans aged 85 and older was projected to zoom from about 2% of the nation's population in 2010 to roughly 5% in 2050. In real numbers, that means that Omega's base of possible customers is soaring from about 6 million to a projected 21 million.
At the end of the first quarter, Omega Healthcare owned or held mortgages on 547 facilities with approximately 61,993 licensed beds (59,622 available beds) located in 37 states and operated by 49 third-party healthcare-operating companies.
And it isn't standing pat: In the first quarter, Omega continued its growth strategy by allocating $117 million to new investments and an additional $4 million to capital-improvement projects.
Omega's strategy is a good one – and is important to look at, albeit quickly, since it illustrates why it's such a great dividend play.
You see, instead of investing in mortgages, the company buys the real estate and leases it on a long-term basis to a healthcare operator, which takes on the operating risk – including the sometimes tricky Medicare reimbursements.
This approach generates a lower up-front yield than mortgage investment. However, the leases are written with an "escalator" clause for inflation, and Omega Healthcare remains the owner of the property itself, which means the yield on OHI's investments tends to rise with inflation.
This shrewd strategy provides Omega with an additional benefit: As the owner of the properties, OHI – and not the operator – gets to take the depreciation on them. That depresses its net income for bookkeeping purposes, but doesn't actually remove any cash from the company till.
And that has a big benefit for shareholders: Omega doesn't get a tax benefit (because REITs don't pay tax at the corporate level); but it does allow the company to pay out a high percentage of its cash flow as dividends.
And we've already demonstrated how powerful a concept that can be after you've held the stock for some time.
This is a well-run company.
Gross profit margins are rising, and exceeded 65% in the most recent quarterly report. The net profit margin of 43% was also high: In fact, this metric was substantially higher than the REIT industry average.
Net operating cash flow – a key for a dividend-dependent stock like OHI – was well above the industry growth rate of 11%. In fact, it rose nearly 56% to $79.90 million – blowing away the industry average cash-flow-growth rate of 11.11%.
Omega outperforms its peers in almost every category. Revenue growth, for example, surged 15.5% in its most recent quarter. That top-line growth bolstered the bottom line, with earnings per share (EPS) zooming nearly 27%.
In the past fiscal year, per-share earnings jumped from $1.11 to $1.46, an increase of 32%. Net income rose from nearly $34 million to more than $47 million, a 39% advance.
Not surprisingly, in a market as uncertain as this one, Omega Healthcare is gaining a following among investors who are seeking predictable income, with growth and safety. That's why the stock is up 63% over the past two years. Since the start of February, when the broad markets bounced back from their sell-off, Omega has gained about 14%.
A week or so ago, I noticed that TheStreet.com rated OHI as one of three dividend stocks it ranked as a "Buy." And while the "consensus" target price is actually lower than the market price, individual target prices go as high as $40 – about 13% above current levels (for a total return of 19% when just the current dividend payout rate is factored in).
The fact that the consensus target price is so low tells us that target-price boosts are likely – serving as potential catalysts to move the share price higher.
In the fact of an inflationary environment – and an uncertain stock market – this is definitely a stock you'll want to have now. And given what we see long term for both medical costs and the aging U.S. population, it's also a stock you'll want to own for years to come.
And this is a good one.
Stop back tomorrow. And have a great week.
[Editor's Note: Unless otherwise directed, we recommend investors employ a 25% "trailing stop" on all holdings.]
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