The successful run of this REIT continues this year.
Real estate investment trusts (REITs) present a lush landscape for those seeking income investments. This is attributed to REITs’ business model, which permits them to bypass corporate income tax, provided they dispense 90% of their profits as dividends to shareholders, who then absorb a portion of the tax obligations.
The crux of investing in REITs lies in assessing the sustainability of the company’s dividend you’re interested in. Its sustainability largely depends on earnings, though debt maturity also plays a critical role.
Tanger Factory Outlet Centers (NYSE: SKT) stocks have witnessed a 29% uptick year-to-date and offer a 4.3% dividend yield. But is the retail REIT’s dividend stable?
Prominent Outlet Mall Operator
Tanger Factory Outlet Centers is among the largest outlet operators in the U.S. By the end of 2022, the firm operated 29 outlet centers, offering 11.4 million square feet of gross leasable area. These outlets house 2,200 stores featuring 600 varied brands. Tanger also has an additional outlet center under construction.
The outlet center model entails retailers offering branded merchandise at substantially lower prices than department stores and full-price channels. To prevent market cannibalization, these outlet centers are typically stationed far from shopping malls, often near fast-growing suburbs just off the interstate. Tanger is in 18 states, with the highest square footage in South Carolina, New York, and Georgia.
A strong labor market bolsters consumer spending
The state of Tanger’s success is intrinsically linked to the health of the U.S. consumer market. Despite a significant hike in the Fed funds rate by the Federal Reserve in the previous year, the labour market is still robust, with workers earning more. Unless a recession hits the U.S., Tanger’s outlets predominantly sell non-essential items, a positive sign for consumer spending. Should consumer spending dwindle, shoppers who usually opt for full-price may switch to Tanger’s outlet centers.
For the fiscal year 2023, Tanger expects its funds from operations (FFO) per share to range between $1.82 and $1.90. REITs often use FFO as an earnings indicator as the net income calculated by generally accepted accounting principles (GAAP) tends to understate the company’s actual cash flow generation. Hence, REITs may appear expensive on a price-to-earnings basis as analysts generally evaluate them based on price-to-FFO.
Tanger’s stocks trade at a modest multiple and the dividend is sufficiently covered
Based on Tanger’s forecast, the company trades 12.4 times the guided 2023 FFO per share, a fair multiple for a leading REIT. Tanger’s annual dividend per share is $0.98, comfortably covered by the company’s FFO projection. According to the guidance’s midpoint, Tanger’s payout ratio (dividend divided by earnings) is 53%, considered low for a REIT. This indicates Tanger has the flexibility to increase its dividend. Indeed, Tanger has raised its dividend three out of the last four quarters.
Given its reasonable trading multiple and earnings almost double its dividend (as gauged by FFO), Tanger Factory Outlet Centers proves an enticing option for income investors. Moreover, the company has been steadily increasing its dividend. With an appealing yield and robust stock performance year-to-date, Tanger makes a strong contender for an income investor’s portfolio.
Given its performance and sustainable dividend yield, Tanger Factory Outlet Centers exhibits strong potential for income investors. With an appealing product, a solid track record of increasing dividends, and stock performance on an upward trajectory year-to-date, it presents a compelling case for inclusion in an income-focused investment portfolio. Alongside its reasonable trading multiple and earnings significantly exceeding dividends, Tanger continues to prove its worth in a competitive market. Investors keen on stable income and future growth should closely monitor Tanger’s promising trajectory.
