Twenty-six years of continuous dividend increases, a reasonable (aka “sustainable”) yield of 3.4%, Essex Property Trust (ESS) may be undervalued. It also might be a good dividend income stock.
ESS is Fully Certified, passing ALL Dividend System criteria. It has ‘Premier’ status being in the upper percentiles of this month’s stock universe. The company has increased dividends for 26 years, making it a member of the Dividend Aristocrats. We consider ESS to be a Dividend Income stock.
GROWTH: ESS’s 5-year average dividend growth rate is 8.9%, slightly below the dividend universe average of 9%. Free cash flow has grown at an average rate of 10.5% per year for the last 5 years versus the dividend universe at 6.5%, so ESS is performing very well.
INCOME: ESS’s current dividend yield is 3.35%, slightly above the average at 2.95%
SAFETY: We use the Dividend Coverage Ratio to measure the dividend’s safety – higher is better. ESS has a DCR of 1.6 which is below our minimum requirement of 2.0 (but less than the generally accepted 1.2 as a minimum), so some due diligence on dividend sustainability may be in order.
VALUATION: The price at time of analysis was $247.33, which we consider Undervalued. A fair price based on historical PE ratio would be around $449.93, but that seems a bit high. A fair price based on dividend history would be $288.54 (much more likely), and still offering a bit of a safety margin–and a more reasonable conclusion on valuation.
TIMING: the Dividend Yield and Price/Earnings Ratio indicate that ESS has ‘Medium+ Buy Signal,’ so this may be a good entry point in terms of it’s historical range based on PE and Yield.
Summary
We consider ESS to be an Income Stock. It’s currently Possibly Undervalued, the dividend produces a Strong yield, with a Long dividend streak, Nice free cash flow growth. ESS produces a weak total return, with low growth. The dividend coverage meets minimum. The stock’s performance is very reliable. Based on our Dividend System™ comparative rankings, we rate Essex Property Trust Inc a ‘B+,’ a Good Income Investment.
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