Boasting the longest dividend growth track record amongst REITs, Federal Realty stock (NYSE:FRT) has become a favorite among income investors. With its outstanding 56 consecutive years of dividend increases, weathering various recessions and economic challenges, the retail REIT has earned its place in the sector’s spotlight. Still, in the face of impending rate cuts, investors may be overrating the stock. Given the availability of more attractive income-producing choices among REITS, I am neutral on FRT.
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Why Do Investors Love FRT’s Dividend?
Federal Realty stands out as a premier choice for income-focused investors, backed by an unparalleled track record of more than half a century of dividend growth. Investors place their trust in Federal Realty with good reason – no other REIT comes close to matching its exceptional history of dividend growth.
To put it into perspective, the nearest competitors in this regard, Universal Health Realty Income Trust (NYSE:UHT), NNN REIT (NYSE:NNN), and Essex Property Trust, Inc. (NYSE:ESS), trail behind with track records of 39, 34, and 29 years, respectively – a significant gap compared to FRT’s impressive performance.
The company’s success in achieving this remarkable feat can be attributed to strategic investments in highly-resilient properties. These properties consistently generate stable income, even during the most challenging economic environments. Specifically, Federal Realty owns 102 open-air retail hub properties strategically located in first-ring suburbs within high-barrier markets.
Operating in key metropolitan areas such as Boston, Silicon Valley, and Miami, where the average household income exceeds $150,000, the company thrives on robust consumer spending. This, in turn, attracts high-quality retail tenants, resulting in strong leasing outcomes for Federal Realty – a trend that has historically persisted even during unfavorable market conditions.
The COVID-19 pandemic makes for a great example, as it posed a unique challenge to retail REITs, which grappled with many retailers temporarily suspending their operations. However, Federal Realty’s portfolio of open-air properties demonstrated resilience and continued to deliver positive results. This allowed the company to maintain its track record of dividend increases.
Further, Federal Realty is projected to achieve funds from operations (FFO, a cash-flow metric used by REITs) per share of $6.55 this year, surpassing its pre-pandemic (FY2019) FFO/share result of $6.33. I believe this is particularly commendable, given the backdrop of a rising-interest-rate environment that has notably compressed the profitability of most companies operating in the real estate sector recently.
There are Better Dividend Picks Among Retail REITs, Nonetheless
While FRT has become a favored choice among income-oriented investors eyeing retail REITs, I contend that the industry has superior dividend options. This view is grounded in two primary factors: FRT’s valuation appears steep, driven by investors’ willingness to pay a premium for the stock, and the company’s unimpressive pace of dividend growth.
Examining FRT’s valuation, the stock trades at approximately 16 times this year’s expected FFO/share, suggesting a premium multiple. This seems particularly unjustified, given the relatively subdued growth prospects of the company. Despite the resilience of FRT’s properties in generating consistent cash flows, the strategic choice of signing long-term leases for stability has sacrificed potential growth.
Sure, the company is expected to post record FFO/share this year. However, the $6.55 estimate for FY2023 implies a 10-year compound annual growth rate (CAGR) of 5.62% from 2013’s FFO/share of $4.61. That’s a very weak growth rate, in my view. Wall Street analysts expect this trend to persist, forecasting FFO/share growth in the mid-single digits in the coming years.
At the same time, the stock’s yield stands at a mere 4.26%. Let’s compare this with some other industry-leading retail REITs: Simon Property Group (NYSE:SPG) trades at a forward P/FFO of 11.8 (based on full-year 2023 estimates) and yields 5.3%. Realty Income (NYSE:O) trades at a forward P/FFO of 14.2 and yields 5.3% as well. NNN REIT (NYSE:NNN) trades at a forward P/FFO of 13.5 and yields 5.2%.
Clearly, investors have been willing to pay a premium for the stock due to its legendary status in the industry. However, this overvaluation, which also comes at the expense of a below-average yield, could suppress shareholder returns over the long run.
Furthermore, despite FRT’s extended track record of dividend growth, the pace of this growth has been disappointingly slow. Management has opted for conservative dividend hikes to maintain a healthy payout ratio and safely sustain annual dividend increases. Thus, the company’s five-year dividend CAGR has slowed dramatically in recent years, at just 1.5%. It’s notably below inflation rates, too.
Consequently, despite the reliability of FRT’s dividend growth, the relative weakness of the dividend in terms of the yield/dividend growth relationship raises concerns about its long-term attractiveness to shareholders.
Is FRT Stock a Buy, According to Analysts?
Checking Wall Street’s sentiment on the stock, Federal Realty currently boasts a Moderate Buy consensus rating based on four Buys and six Holds assigned in the past three months. At $108.30, the average FRT stock forecast implies 5.9% upside potential.
The Takeaway
In conclusion, Federal Realty has undeniably earned its reputation as a dividend powerhouse, boasting an unrivaled track record of 56 consecutive years of increases. Its resilience during economic challenges, particularly during the COVID-19 pandemic, speaks to the strength of its property portfolio.
However, given the stock’s premium valuation, unimpressive dividend growth pace, and the availability of more attractive options in the retail REIT sector, including some of the other names I mentioned, I hold a neutral stance on FRT.
