Simon Property Group Inc (NYSE:SPG) has a Dividend Growth Score of 43, indicating the dividend growth prospects are about average. Now that’s not to say bad, after all, since long-term total returns are driven by yield and income growth. A stock with a highly secure dividend of 3.7% needs only to grow the dividend by just under 6% in order to be a market beater.
As you can see, 6% long-term dividend growth is well within Simon Property’s historical track record. Of course you’ll note that this REIT’s dividend payout is more variable than some other dividend stocks. That’s because during times of economic stress management sometimes pulls back on the dividend in order to ensure it can keep growing for the future (due to REITs’ high payout ratios and financial leverage).
In other words, while the long-term payout growth record is solid, Simon Property Group is no dividend aristocrat.
That being said, given that Simon Property Group is currently growing FFO per share by 6.6% per year, has over $1 billion of new investments planned for next year (as well as 2018), and has $6.5 billion in available liquidity, long-term dividend growth investors can continue to expect 6% to 7% dividend growth in the coming years.
Valuation
When it comes to valuing REITs you don’t want to use EPS and a P/E ratio. That’s because GAAP earnings require deducting depreciation of assets, and properly maintained real estate properties generally increase in value. In other words, the EPS of a REIT doesn’t signify how well it’s able to protect or grow its dividend.
For that you want to look at adjusted funds from operation (i.e. free cash flow), which some REITs call “funds available for distribution”. Simon Property Group currently trades at 18.3 times AFFO (adjusted funds from operation).
| Metric | Current | 13-Year Median Value | Historic Discount |
| P/AFFO | 18.3 | 17.9 | -2.2% |
| Yield | 3.7% | 3.1% | 19.4% |
Source: FastGraphs, Gurufocus
Another key metric to look at is the yield and where it is compared to its historical norm. As you can see from the above table, Simon Property Group is trading at a slight premium to its historical P/AFFO but a significant discount on a yield basis.
Thanks to Simon Property Group declining over 20% since the REIT correction began on August 1, the stock could represent reasonable value for long-term income investors seeking exposure to REITs.
Just be aware that the REIT correction may not be over and Simon Property may still have further to fall. While that potentially means great future opportunities to add on dips, if you are a short-term horizon investor, such as a retiree who will need to sell shares to cover living expenses, you may want to wait for a better buying opportunity.
Most of the REITs I’m watching would get me excited after another 10% correction, but they are certainly starting to get my attention now.
Conclusion
I’m not trying to say that Simon Property Group is the perfect sleep well at night, or SWAN, REIT. After all, its business model is tied to the health of the economy, and specifically consumer spending. These factors caused it to reduce its dividend during the last recession.
That being said, as far as mall REITs go, Simon Property Group has proven itself more than capable of generating industry leading long-term shareholder wealth and income growth.
With the economy showing some signs of a stronger recovery, and rising interest rates having caused a substantial correction in the share price, today probably isn’t the worst time to consider a position in a high-yield dividend growth stock such as Simon Property Group. Just be aware that in the short to medium-term rising rates may continue to push the shares lower, meaning better buying opportunities may yet present themselves.
Disclosure: None
Additional Links:
(1) http://www.simplysafedividends.com/real-estate-investment-trusts-reits/
(2) http://www.simplysafedividends.com/portfolios/conservative-retirees/
(3) http://www.simplysafedividends.com/top-10-financial-ratios-dividend-investing/
