Down 42%, Is Ultra-High-Yield W.P. Carey Stock a Buy on the Dip?

W.P. Carey (WPC), a leading net lease REIT, has experienced a significant decline in its stock price, down 42% from its peak. This raises the question: is W.P. Carey stock a buy on the dip, or are there still concerns that investors should be aware of? Let's dive into the company's recent performance, dividend history, and the risks and opportunities in its current investment thesis to provide some clarity.



Recent Performance and Dividend History

W.P. Carey has faced challenges in recent years, grappling with widespread economic uncertainty, soaring inflation, and elevated interest rates. However, the company has shown signs of recovery, with the Federal Reserve's rate cuts injecting optimism into the market. In 2024, W.P. Carey's stock price decreased by -19.50% over the last 52 weeks, with a beta of 0.99, indicating similar price volatility to the market average.

W.P. Carey's dividend history has been marked by fluctuations, with an annual dividend of $3.52 per share as of January 15, 2025, yielding 6.49%. The company's dividend yield has averaged 5.76% over the last five years. In late 2023, W.P. Carey faced investor backlash after raising and quickly cutting its dividend to $0.86. However, the company has since increased its quarterly dividend to $0.880 per share, demonstrating a commitment to maintaining and growing its dividend payouts.



Risks and Opportunities in W.P. Carey's Investment Thesis

W.P. Carey's current investment thesis presents both risks and opportunities for investors.

*Opportunities:*

1. Strategic Reinvestment in Industrial and Retail Sectors: W.P. Carey anticipates that its substantial investments in industrial and retail sectors will start yielding positive earnings impacts in 2025. These sectors are expected to remain steady and benefit from positive tailwinds, such as e-commerce needs and increased consumer spending.
2. Long-term Leases and Rent Escalations: The company's strategy of reinvesting sales proceeds into properties with long-term leases and rent escalations in North America and Europe positions it well for future growth. This could enable W.P. Carey to enhance its adjusted funds from operations (FFO) and potentially increase dividends.
3. Liquidity from Past Divestitures: W.P. Carey has a significant cash position of $818.45 million, which can be used for strategic investments and acquisitions, providing flexibility in its investment thesis.

*Risks:*

1. Interest Rate Uncertainty: The extent of the recovery in the net lease market in 2025 remains uncertain, largely tied to the future of interest rates. The timing and pace of further rate decisions will depend on many factors, including the impact of the incoming administration's policies on inflation.
2. Dividend Sustainability: W.P. Carey's dividend payout ratio stands at a high 1.57, raising concerns about the sustainability of its dividend. Although the company has maintained a forward dividend yield of 6.53%, investors should be cautious about the potential impact on the dividend payout.
3. Potential Distress: W.P. Carey's Altman Z-Score indicates distress, suggesting that the company may be at risk of financial distress or bankruptcy. This risk should be considered when evaluating the company's investment thesis.
4. Market Volatility: W.P. Carey's stock price has decreased by -19.50% in the last 52 weeks, and its beta is 0.99, indicating that its price volatility has been similar to the market average. Market volatility and fluctuations in the company's stock price could impact its investment thesis.

Conclusion

W.P. Carey's recent performance and dividend history suggest that the company has faced challenges but has shown signs of recovery. The company's investment thesis presents both opportunities and risks, with strategic reinvestment in industrial and retail sectors, long-term leases, and liquidity from past divestitures as potential upsides. However, investors should be aware of the risks associated with interest rate uncertainty, dividend sustainability, potential distress, and market volatility.

In conclusion, W.P. Carey stock may be a buy on the dip for investors with a long-term perspective and a willingness to accept the associated risks. However, investors should carefully consider the company's financial health, dividend sustainability, and the potential impact of market volatility on their investment decisions.