This Double-Digit Yielder Looks Interesting
Over the past year, real estate investment trusts (REITs) haven’t been an investor favorite. And due to the downturn in the retail industry, REITs that own malls and shopping centers were hit the hardest.
CBL & Associates Properties, Inc. (NYSE:CBL), for instance, has a portfolio of 119 retail properties totaling 74.4 million square feet. And its share price plunged more than 50% over the last 12 months. Ouch!
The thing is, though, due to the inverse relationship between dividend yield and share price, CBL stock’s downturn has pushed its yield up to extremely high levels. Trading at $4.02 apiece, the company offers a jaw-dropping yield of 19.9%.
To put it into perspective, the average dividend yield of all S&P 500 companies stands at just 1.87% at the moment. In other words, investors purchasing CBL shares today can lock in a yield more than 10 times the benchmark’s average.
The big question, of course, is whether the payout is safe. Quite often, the only reason a company can offer a double-digit yield is that investors don’t believe the payout to be sustainable. For income investors with a long-term horizon, buying a stock before its dividend gets cut can turn into a very expensive lesson.
On that front, note that CBL & Associates Properties has cut its payout before. Last November, the company reduced its quarterly dividend rate from $0.265 per share to $0.20 per share, representing a 24.5% decrease. (Source: “Dividends,” CBL & Associates Properties, Inc., last accessed April 20, 2018.)
Does the company make enough money to cover its reduced payout? Well, in the real estate business, a key performance metric is funds from operations (FFO), which measures the cash generated from a REIT operating activities. According to CBL’s most recent earnings report, the company generated adjusted FFO of $0.56 per share in the fourth quarter of 2017. Given its weighted average cash dividend of almost $0.21 per share for the quarter, it had a very conservative payout ratio of 37.3%. (Source: “CBL & Associates Properties Reports Results for Fourth Quarter and Full-Year 2017,” CBL & Associates Properties, Inc., February 8, 2018.)
In full-year 2017, CBL earned adjusted FFO of $2.08 per diluted share, while its weighted average cash dividend totaled almost $1.03 per share. That comes out to a payout ratio of 49.4%.
Therefore, in 2017 (a terrible year for CBL’s stock price performance), the company was actually paying out less than half of the cash it generated from operations. A low payout ratio like this should leave a wide margin of safety so that, even if business deteriorates going forward, there’s still a good chance for CBL to make enough money to cover its payout.
And despite the market’s bearish sentiment towards the retail sector, CBL’s tenants are doing just fine. In the first two months of this year, CBL portfolio’s reporting for tenants under 10,000 square feet said that their sales per square foot increased by 5.6% year-over-year. (Source: “CBL Properties Year-to-Date Sales off to Strong Start and Exceed National Average,” CBL & Associates Properties, Inc., March 23, 2018.)
At the end of the day, I wouldn’t call CBL stock a slam dunk. The retail industry still faces uncertainty, and the company’s occupancy rate could use some improvement. But with a well-covered dividend, CBL & Associates Properties’ 19.9% yield deserves a look.