Is Now the Time to Buy HCP, Inc.?

By Markets Fool.com

If we could go back in time to 1985, HCP, Inc's IPO would unquestionably be a stock to buy. The company, which manages and operates real estate in the health care field, is one of just three real estate investment trusts, or REITs, that are part of theexclusive"Dividend Aristocrats" club comprised of companies that have raised their dividends every year for at least 25 years.

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The stock chart tells the story: long-term investors in HCP have made out like bandits.

HCP Total Return Price Chart

But as all mutual fund prospectuses say, "Past performance is not an indication of future performance." Can someone buying the stock today expect more years of market-beating performance and rising dividends, or are HCP's best days behind it?

The business and the portfolio today
HCP operates five types of real estate, all within in the field of health care. Senior housing and skilled nursing facilities are the company's bread and butter, accounting for 66% of the company's assets. The company also owns medical office buildings, life sciences buildings for biotechnology and pharmaceutical firms, and hospitals. In total, the company owns 1,154 properties worth an estimated $22 billion.

Big... but still growing
The company's financial metrics show a company that has been able to consistently grow. Over the past five years, the company has grown adjusted funds from operations at a 7% annualized clip, while doubling the number of properties it manages. In addition to offering a strong current dividend yield of nearly 5%, the company has been raising its dividend 3.5% annually the past five years, which is comfortably higher than the rate of inflation.

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Demographic tailwinds
It's no secret that the American population is aging and living longer, two trends that benefit HCP greatly. The number of elderly people in the U.S. is projected to grow rapidly. By 2050, there will be roughly 80 million senior citizens.

Source: Company Presentation from REITWorld 2014

And the longer people live, the more likely they are to need assisted living facilities.The U.S. Department of Health and Human Services' Administration on Aging estimated that roughly "3.5% of the 65+ population in 2012 lived in institutional settings such as nursing homes (1.2 million). However, the percentage increases dramatically with age, ranging (in 2012) from 1% for persons 65-74 years to 3% for persons 75-84 years and 10% for persons 85+."

An older population will require more senior living options, so demand for HCP's properties should remain strong, while providing opportunities for continued expansion for many years going forward.

Valuation: A zone of reasonableness

Just as the price to earnings ratio is the most common shorthand valuation method for corporations, substituting AFFO in for earnings gives us a similar tool to evaluate REITs. The company estimates that 2014 adjusted funds from operations will be $3.00 per share.

HCP's valuation trades roughly in line with those ofHealth Care REIT, Ventas, and Omega Healthcare Investors, its peers in the senior housing and health care real estate fields.

Considering HCP's growth prospects and stable history, this company has earned a premium valuation, yet trades at a bargain one.

Foolish final thoughts
HCP is exactly the type of company Foolish (with a capital "F") investors look to partner with. The company has a long track record of being a great operator in its field, it's shown amazing growth for 30 years, and there is still plenty of opportunity for growth ahead. Management makes rewarding shareholders a priority with a high and growing dividend, and the stock can be bought at a reasonable valuation. In my opinion, HCP's next 30 years look as good as the first 30.

The article Is Now the Time to Buy HCP, Inc.? originally appeared on Fool.com.

Chris Walczak has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.