Jan 16, 2015: Bought 110 shares of STWD at $23.61 per share.
Founded in 2009 and headquartered in Greenwich, Connecticut, Starwood Property Trust Inc (NYSE:STWD) is the largest commercial mortgage real estate investment trust in the United States. The company is focused on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments.
STWD is the Financials sector winner and is ranked 8th in the January 2015 edition of my 10 Dividend Growth Stocks article series. The company has a six year streak of consecutive dividend increases. It pays quarterly dividends of 48¢ per share in the months of January, April, July and October.
Since its founding, the share price of STWD increased by about 50%, yet it underperformed the S&P 500 by a similar amount. The stock has an average 5-year beta of 0.69. For the past year, STWD has traded in a tight channel between $21.78 and $24.52:
Source: Scottrade
At my buy price of $23.61, STWD yields an impressive 8.13%:
Founded in 2009 and headquartered in Greenwich, Connecticut, Starwood Property Trust Inc (NYSE:STWD) is the largest commercial mortgage real estate investment trust in the United States. The company is focused on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments.
STWD is the Financials sector winner and is ranked 8th in the January 2015 edition of my 10 Dividend Growth Stocks article series. The company has a six year streak of consecutive dividend increases. It pays quarterly dividends of 48¢ per share in the months of January, April, July and October.
Since its founding, the share price of STWD increased by about 50%, yet it underperformed the S&P 500 by a similar amount. The stock has an average 5-year beta of 0.69. For the past year, STWD has traded in a tight channel between $21.78 and $24.52:
 |
At my buy price of $23.61, STWD yields an impressive 8.13%:
An investment in STWD five years ago would have doubled your money and YoC would now be 12.67%!
 |
Analysis of STWD
My fair value estimate of STWD is $29, so I bought shares at a discount of about 24%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.
 |
Since STWD is a REIT (Real Estate Investment Trust), my normal selection criteria do not apply entirely. When estimating the value of a REIT, one needs to look beyond traditional metrics like earnings-per-share and price-to-earnings.
REITs are more appropriately valued by considering funds from operations (FFO), an indication of the cash flow generated by the REIT. It is calculated by adding depreciation to earnings and subtracting gains from property sales. Real estate often appreciates rather than lose value like fixed plant or equipment investments do, so adding depreciation to earnings gives a more accurate view of the cash generating capabilities of the REIT.
To account for capital expenses required to maintain a portfolio's properties, professional analysts adjust the FFO by subtracting capital expenses. The residual cash flow is more representative of the true operational cash flow and a better predictor of future dividend payments.
In the near future, I'd like to develop REIT-specific selection criteria that use FFO rather than EPS. For the time-being, though, my present selection criteria must suffice:
STWD passes the following of my selection criteria:
- A streak of at least 5 years of dividend increases (6 years)
- Dividend yield exceeds 2.75% (8.13%)
- Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (85.30%)
- Price to earnings ratio (P/E) is less than 20 (TTM 10.42x and Forward 10.87x)
- P/E to annual EPS growth (PEG) ratio is less than 2 (1.37)
- 5-year CAGR is at least 10% (77.17%)
- Price discount is at least 5% of fair value estimate (23.8%)
- Earnings per share (EPS) percentage payout is less than 40% (84.58%)
- Debt to equity ratio is below 50% (100%)
- Reasonable confidence in continued dividend growth (Uncertain)
 |
Other ratings for STWD
|
Concluding Remarks
STWD is tops the Financials Sector in my January dashboard of dividend growth stocks and is ranked 8th overall. Although it is a little riskier than my other dividend growth stocks, I like the fact that it yields over 8%. As a REIT, STWD must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Several recent articles provide positive reviews of STWD. Baton Investing rates STWD a buy below $25, declaring it the 21st century's new treasury bond. Brad Thomas considers STWD safer than peer commercial mortgage REITs, noting that STWD has outperformed many leading REITs such as Annaly Capital Management, Inc (NYSE:NLY), Realty Income Corporation (NYSE:O) and Digital Realty Trust, Inc (NYSE:DLR) over the latest 3-year period.
One concern about REITs is that they may have difficulty to continue growing earnings when the cost of debt increases due to higher interest rates. STWD is less sensitive to rising interest rates due to its focus on commercial real estate. In fact, STWD should benefit from rising interest rates given its high volume of LIBOR-based floating rate loans. Over the past 5 years, STWD has funded more than $10 billion in loans without suffering any loan losses.
110 shares of STWD adds $211.20 to DivGro's projected annual dividend income.
Great buy. I've been watching this stock the past few months. I will likely join you on this one.
ReplyDeleteThis is an interesting one! After I found it in my monthly analysis in January, I saw two quick fire articles posted on Seeking Alpha, both praising the stock. Good luck!
DeleteThanks for sharing your recent buy with us. While not on my watch list I have seen this name come up on various screens I run from time to time. I guess I just never pulled the trigger on it as it is a sector that I'm not comfortable holding in my long term portfolio. Still it's a name that shows good promise going forward especially with its dividend growth.
ReplyDeleteI only noticed STWD for the first time in January. Since then, I've been researching REITs to understand the ins-and-outs better. Stocks in this category usually have strong yields, but are taxed differently. I'll need to look into that aspect more carefully.
DeleteThanks for stopping by!
A nice buy although it's a rather young company, which brings uncertainty in dividend growth... looks like a riskier one, but a risk that might bring great results too! Keep us updated on it! ;-)
ReplyDeleteYes -- certainly riskier than many of my other holdings. 8% is worth it, in my opinion. We'll see how long it lasts and if it will continue with its current pace of dividend growth.
Delete