This month our model portfolio initiated a new position in Preferred Apartment Communities ($APTS). It’s a position we’ve been waiting to take for the last few months in order to get closer to ex-dividend.
Why we like APTS
APTS has a nice dividend growth chart, although it has slowed recently. However, at a relatively high yield of 6.7% and a 3 year growth rate of almost 12%, it will reach our target of 10% yield on cost in the next 5 years. Given its history of growing income and relatively low risk profile in residential property, we think this is a relatively low risk point to enter at a fair valuation.
Revenue and cash flow are growing consistently, which is a great indicator of management’s ability to continue generating cash flow to pay future dividends.
Risks
APTS is highly tied to residential real estate as defined by their strategy.
Preferred Apartment Communities, Inc. is a Maryland corporation formed primarily to own and operate multifamily properties and, to a lesser extent, own and operate student housing properties, grocery-anchored shopping centers and strategically located, well leased class A office buildings, all in select targeted markets throughout the United States.
Residential tends to have the highest multiples to income, which may leave them exposed to more risk in the event of an economic downturn.
Valuation
We typically start with the Dividend Discount Model for our dividend growth investments:
3 Year Dividend Growth: 11.96%
Trailing 12 month Dividends: 1.05
Cost of Equity: 18.1%
Value = 1.05 + (1 + 11.96%) / (18.1% – 11.96%)
Value = 19.14
Using this model, at the current price of around $16, APTS is about 20% undervalued. While valuation and maximizing rate of return on invested capital are important facets of investing, it is less important for dividend growth investors, so grabbing APTS at a nice valuation is a nice bonus!
So there we have it, is APTS part of your dividend growth portfolio? We’d love to hear your thoughts!
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