Looking for Oversized Dividends? Read This
Whether you are an income investor or growth investor, it’s hard to deny that valuations are now bloated in the U.S. stock market.
To give you an idea, the cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 Index is at 31.02 times, substantially higher than the index’s historical average CAPE ratio of 16.74 times. (Source: “Shiller PE Ratio,” multpl.com, last accessed September 30, 2020.)
One of the byproducts of a bloated stock market is that yields are generally lower.
Again, using the S&P 500 Index as an example, we see that the components have an average dividend yield of 1.77% right now, which is less than half of the index’s historical average dividend yield of 4.32%. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed September 30, 2020.)
However, even though the market appears to be overvalued, not every stock is shooting through the roof.
In particular, the COVID-19 pandemic led to a major sell-off earlier this year. While the market has bounced back, some stocks are still in the doldrums. If the pandemic’s impact on a beaten-down stock’s business is temporary, picking up some shares from the floor could be an opportunity. And investors might be able to earn an oversized yield along the way.
With that in mind, let’s check out Simon Property Group Inc (NYSE:SPG).
Simon Property Group is one of the biggest real estate investment trusts (REITs) in the market. It is not only an S&P 500 component, but also a member of the S&P 100 Index, which is a subset consisting of the largest and most established companies in the S&P 500. In fact, SPG is currently the only real estate company in the S&P 100 Index.
As of June 30, 2020, Simon Property’s portfolio consisted of 235 properties totaling 191 million square feet in North America, Asia, and Europe. At the same time, the company had a 22.4% stake in Paris-based real estate company Klepierre, which has a portfolio of shopping centers in 15 European countries. (Source: “2Q 2020 Supplemental,” Simon Property Group Inc, last accessed September 30, 2020.)
The REIT’s focus is on retail. In the first six months of this year, Simon Property earned more than 80% of its net operating income from U.S. malls and premium outlets.
Now, you can probably see why investors might be concerned. Retail is one of the hardest hit sectors this year.
When the government imposed lockdowns, a lot of retailers simply could not open for business. And when retailers can’t make money, they may not have the ability to keep paying rent.
This concern led to a major downturn in the REIT’s share price. Year to date, SPG stock is down more than 55%. Ouch!
The pandemic resulted in a dividend cut, too. Before the pandemic, SPG stock had a quarterly dividend rate of $2.10 per share. Now the quarterly payout is $1.30 per share. (Source: “Dividend History,” Simon Property Group Inc, last accessed September 30, 2020.)
However, because of the sheer magnitude of the drop in the company’s stock price, its dividend yield actually went up. Trading around $65.00 apiece, SPG stock offers an annual dividend yield of eight percent.
In other words, if an investor buys Simon Property stock today, they would be earning a yield that’s over four times as much as the average S&P 500 company.
Obviously, buying a beaten-down, high-yield stock does come with a degree of risk. And, as I mentioned earlier, the premise for why investors would want to pick up a stock on the cheap is that the pandemic’s impact on the company’s business is not permanent.
The good news is, there are signs that the pandemic’s impact on Simon Property Group Inc’s business is indeed temporary.
You see, when REIT reported second-quarter results on August 10, it revealed that in its U.S. retail portfolio it collected “approximately 51% of its contractual rent billed for April and May combined, approximately 69% for June and approximately 73% for July with only de minimis deferrals.” (Source: “Simon Property Group Reports Second Quarter 2020 Results,” Simon Property Group Inc, August 10, 2020.)
Those numbers don’t stand out on their own. However, the pattern of stronger collections in June and July shows that the situation was indeed improving for the REIT.
The reality was that Simon Property’s retail properties were closed, in aggregate, for around 10,500 shopping days in the second quarter of 2020. But as many businesses have reopened, the REIT’s financials should get much better. As of August 7, 91% of tenants in Simon Property’s U.S. retail portfolio were open and operating.
As you’d expect, the REIT made less money in the second quarter: its funds from operations (FFO) came in at $2.12 per diluted share, down from the $2.99 per share earned in the year-ago period. However, Simon Property Group Inc’s second-quarter FFO still covered its $1.30-per-share second-quarter dividend with ease.
Of course, other than the impact from the pandemic, investors have also been concerned about how mall and shopping center REITs would perform given the ecommerce headwinds. As consumers embraced online shopping, a lot of brick-and-mortar retailers have experienced substantial sales declines.
On that front, keep in mind that the so-called “retail apocalypse” has been going on for quite a while…and Simon Property was doing just fine.
In fact, in 2019, the company’s comparable funds from operations per diluted share actually grew 4.4%, and its comparable property net operating income increased 1.7%. Moreover, Simon Property’s retailer sales per square foot rose 4.8% in 2019, during which time the REIT’s leasing spread per square foot also improved, by 14.4%.
Bottom Line on Simon Property Group Inc
At the end of the day, no one can deny that there is uncertainty ahead for the retail industry. However, because COVID-19’s damage to Simon Property Group Inc is likely to be temporary, the REIT’s business should show improvements from now on. It’s hard to say when its share price will fully recover, but with an eight-percent yield, SPG stock certainly deserves the attention of income investors.