Monthly Dividend Stocks Lecture Notes

Introduction

• Monthly dividend stocks: Popularity due to regular cash flow.
• Quality count: Few high-quality stocks pay monthly dividends (e.g., Reality Income, Main Street Capital, Stag Industrial).

Focus Stock: Agree Realty Corporation (ADC)

• Current stock price: $61.48.
• Dividend Payment History:
  • Switched from quarterly to monthly dividends in early 2021.
  • Starting yield: ~4.84%.
  • Recent performance: Down ~5% over the past year, ~2.34% YTD decline.

Dividend Breakdown

• 5-year dividend CAGR: 5.64%.
• Payout Ratio: 167.75% (standard metric).
  • True measure: Adjusted Funds From Operations (AFFO) payout ratio.
  • AFFO payout ratio: ~72.9%.

AFFO Explained

• Definition: Adjusted Funds From Operations; more accurate measure of REIT’s cash flow.
• Recent performance: AFFO per share increased by 4.6% to $13.

Earnings Report Highlights

• Investment: $140 million in 50 retail net lease properties.
• Debt Ratio: Pro forma net debt to recurring EBITDA at 4.3x.

Insider Activities

• Insiders have been buying extensively with zero sells in the past year.
• Notable quote: Peter Lynch on insider buying indicates confidence in the stock.
• Short Interest: Slight concern at 6.51%.

Company Overview

• Specialization: Net lease REIT focused on high-quality retail properties.
• Tenants: Majority are well-known, investment-grade companies (e.g., Walmart, CVS).
  • Top Sectors: Grocery stores (9.7%), Home Improvement (8.6%), Tire and Auto Service (8.5%), etc.

Balance Sheet Strength

• Debt Ratio: 4.5x net debt to EBITDA, better than peers like Realty Income (5.3x).
• Historical Performance: Always below 4.5x since 2018.

Dividend Analysis

• Dividend growth: 6%+ 10-year CAGR.
• Sustainability: Monthly dividends with strong growth potential.

Issuing New Shares

• Shares outstanding: Increased significantly from 13 million (2013) to 95 million (2023).
• Strategies for growth: New debt vs. issuing new shares.

Valuation

• Recent performance: Down ~6% over the past 5 years but up over 100% in the last decade.
• Valuation Models:
  • AFFO Multiples: Slightly overvalued compared to peers.
  • Historical Price to FFO: Historically undervalued.
  • Dividend Discount Model (DDM): Indicates undervaluation.

Conclusion

• Buy Criteria: Considering valuation models, an acceptable buy price could range around $55-$58 per share.
• Potential action: Currently not adding to the portfolio but keeping ADC on the watch list.
• Predictable dividends: Provides stability through high yield, growing monthly payments.