HCN: How Do Interest Rates Impact Value?

Market prices are always fluctuating around true fundamental value.  Sometimes, investors become overly optimistic about a particular company or the market as a whole.  When this happens, prices often increase beyond what long-term fundamental growth can justify.  

Other times, an overly pessimistic outlook drives the price of a stock too far down.  At Donaldson Capital Management, we call these kinds of companies “vexed”.  In other words, the market is discounting a stock based upon a current or upcoming headwind.  These headwinds can come in many forms including concerns about future company growth (IBM), legal problems (JPM), or concerns about a particular economic region (AFL).

The market often overreacts to these headwinds, causing these “vexed” companies to be driven below their true fundamental value.  Investors who can see through the short-term doom-and-gloom have an opportunity to purchase high-quality companies at a temporary discount.

One particular company we believe is “vexed” right now is a real estate investment trust (REIT) Health Care REIT, Inc. (HCN).  HCN owns a diverse portfolio of healthcare real estate that includes senior housing communities, skilled nursing facilities, and inpatient/outpatient medical centers.  The price of HCN has dropped by over 29% from highs near $80 in mid-May 2013.

The most obvious reason for HCN’s decline has been the upward hike in interest rates.  An increase in interest rates is negative for REITs such as HCN for two main reasons:

Will the Fed Taper in December?

In May, Federal Reserve Chairman Ben Bernanke mentioned the potential for the Fed to begin tapering their asset purchase program, Quantitative Easing (QE).  Since then, the financial markets have been obsessed with tapering and – more specifically – how it may affect interest rates. 

Many Fed watchers have predicted the Federal Reserve will begin to taper QE sometime in early-to-mid 2014.  After the latest jobs report, there is talk that the Fed may reduce asset purchases sooner rather than later.  

On December 6^th, the Bureau of Labor Statistics released the November jobs report, which showed nonfarm payroll employment grew by 203,000.  The jobs numbers were significantly better than expected and lowered the unemployment rate sharply from 7.3% to 7.0%.

The seemingly good economic news propelled the stock market higher.  That same day, the Dow Jones was up nearly 200 points and the S&P 500 rallied back up above 1,800.

The positive job numbers led many to forecast a QE taper starting at the Fed's last meeting of 2013.  Will the Fed start to taper in December?  Probably not.  Here's why:

The ABCs of Dividend Investing, Part IV: Who Are the ABCs?

After our series of posts titled "The ABC's of Dividend Investing", we received many requests from people asking us to show some specific examples of A, B and C stocks.  We don't typically talk about individual securities on our blog, but we decided to identify a few companies that we own and discuss their dividend characteristics and why we own each of them.

We chose three stocks – one each from our A,B,C sub-portfolios.  For those who have read our posts on the ABC's of Dividend Investing, the features of these sub-portfolios are probably familiar to you.  For those of you that have not, here is a brief summary:

           

What Are the A, B, Cs?

In the early 1990s, we restructured our main dividend investment strategy away from a portfolio focused primarily on high dividend yielding stocks with modest dividend growth into a portfolio comprised of three distinct types of dividend stocks.