With an impressive 56-year streak of consecutive annual dividend increases, Federal Realty (NYSE:FRT) stands out as a leader in the REIT sector. Managing 102 primarily retail real estate projects spanning approximately 26.0 million square feet, Federal Realty has recently faced challenges due to rising interest rates affecting its properties and investment outlook. Nonetheless, the company remains well-positioned to deliver consistent dividend growth to investors. Therefore, I am bullish on the stock.
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Unpacking Federal Realty’s Dividend
Federal Realty’s dividend holds a legendary status among dividend investors. Its growth track record is truly unparalleled. A remarkable feat of endurance, the REIT boasts an extraordinary 56-year streak of consecutive annual dividend increases, demonstrating unwavering prosperity in the face of economic recessions, crises, and challenging real estate landscapes.
Even during the tumultuous Great Financial Crisis of 2007-08 and the unprecedented challenges posed by the COVID-19 pandemic, which led to the downfall of many REITs, Federal Realty not only weathered the storms but emerged stronger. This unmatched track record sets it apart, with the second-longest dividend growth streak for a REIT held by Universal Health Realty Income Trust (NYSE:UHT) at a commendable 38 years.
Federal Realty’s recent dividend growth has experienced a slowdown, registering 4.2%, 1.7%, and 1.3% compound annual growth rates over the past 10, five, and three years, respectively. However, investors remain focused on the stability and sustainability of the dividend. For many, it is a conservative income play.
Despite the rather underwhelming rate at which FRT has grown its dividend, the stock’s dividend yield is impressive. With rising interest expenses suppressing the REIT’s bottom line and income investors dumping the stock over a better risk/reward ratio in T-bills, Federal Realty shares have been pushed to the same levels they were trading at all the way back in 2006. Consequently, the stock’s yield has been pushed to the high end of its historical average range, currently standing at 4.8%.
Although there’s skepticism about the attractiveness of the 4.8% yield given the federal funds rate target of 5.25% – 5.50%, I contend that Federal Realty remains an exceptional dividend growth stock. As the company anticipates record profits this year, there’s a plausible scenario for a resurgence in dividend growth, reaffirming its status as a resilient and promising investment.
Record Profit Expectations Suggest Promising Dividend Growth Potential
Despite rising interest rates pressuring Federal Realty’s bottom line, the company is set to report record profits this year. Therefore, I believe that its dividend growth prospects remain robust. To give you some context, let’s briefly go through Federal Realty’s most recent financials, which prompted management to raise its prior outlook.
For the second quarter of Fiscal 2023, Federal Realty posted revenues of $280.68 million, up 6.3% year-over-year. Leasing remained strong, with 107 signed leases for 576,345 square feet of comparable space in the quarter, boasting a cash-basis rollover rate of 7%. Federal Realty’s portfolio occupancy and leasing rates also saw year-over-year increases.
Importantly, despite the company’s interest expenses growing by 33.6% due to rising rates, Federal Realty still managed to increase its FFO/share by two cents to $1.67. FFO refers to funds from operations, a cash-flow metric used by REITs.
With unexpected growth in such a tough environment instilling higher confidence in management, the company raised its guidance for the year. FFO/share is now expected to land between $6.46 and $6.58. This compares to a range of between $6.38 and $6.58 previously. This implies that the company is set to achieve another year of record earnings. It also implies that Federal Realty’s payout ratio remains very healthy at about 67% when utilizing the midpoint of management’s guidance.
Consequently, I believe that Federal Realty will have no issue with sustaining its legendary dividend growth track record. A re-acceleration in dividend growth is also possible once rates ease.
Is FRT Stock a Buy, According to Analysts?
According to analysts, Federal Realty stock comes in as a Moderate Buy based on four Buys and seven Holds assigned by analysts in the past three months. The average FRT stock price target of $110.91 implies 26.4% upside potential.
The Takeaway
Overall, Federal Realty’s 56-year streak of annual dividend increases reflects its resilience in navigating economic challenges. Despite the gradual slowdown in dividend growth, the company’s focus on stability and viability remains appealing to conservative income investors. In fact, the notable 4.8% dividend yield, coupled with expectations of record profits, positions Federal Realty as a compelling dividend growth stock.
Uncertainties persist regarding the yield’s appeal in a higher interest rate environment. However, the company’s robust financial performance and optimistic guidance suggest a strong foundation for sustaining its legendary track record. The potential for re-acceleration in dividend growth is also compelling.
