Dividend Aristocrats In Focus: Essex Property Trust

We believe total returns for Essex – given all the factors above – should be somewhere in the area of 4% annually. The stock’s dividend yield of 2.5% should be almost entirely offset by a similarly-sized headwind from the elevated valuation.

At the midpoint of 2020 FFO-per-share guidance, Essex is trading for a multiple of 22.4. We see fair value at 20 times FFO-per-share, which introduces a 2.2% potential headwind to annual total returns. We see fair value for the stock at $279, which is about 11% below the current price of $313. As such, Essex is overvalued at present.

If we combine the unfavorable valuation, current dividend yield, and 4% forecast FFO-per-share growth, we have total projected annual returns to shareholders of just 4.2%.

(Click on image to enlarge)

ESS Dividend

Source: Investor Presentation, page 9

Essex has paid increasing dividends for 25 consecutive years, and its average increase since 1994 is in excess of 6%. For obvious reasons, dividend growth investors likely find this to be an attractive quality, and we expect Essex will continue to raise the payout in the mid-single-digits for the foreseeable future.

Unfortunately, this alone is not enough to warrant a buy recommendation, as we are cautious on the valuation and growth prospects.

Final Thoughts

Essex has undoubtedly been a world-class REIT since it went public and began paying dividends a quarter-century ago. The trust has very favorable long-term demographics working in its favor, and a management team that is keen to unlock shareholder value. We think Essex will produce moderate long-term growth and continue to increase its dividend each year.

However, the yield of just 2.5% is low for a REIT, and with shares being overvalued in our view, the stock’s total returns are expected to be modest. Therefore, value and income investors should wait for a price closer to fair value before buying shares. That said, the stock is appropriate for those investors looking for dividend safety and steady dividend growth over time.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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