Simon Property Group (NYSE:SPG) stock is currently trading with a substantial 7% yield attached. Despite the stock not performing well recently, the company’s management continues to raise the dividend following improving financial results with each passing quarter.
This theme is likely to last moving forward, as signaled by the company boosting its guidance for the rest of Fiscal 2023. Simon’s restful payout ratio also suggests the possibility of additional dividend hikes in the near term. Along with the fact that shares appear to be trading at a rather attractive valuation, I am bullish on the stock.
Excellent Start to Fiscal 2023 Despite Sector Headwinds
The real estate sector is currently experiencing strong headwinds, mainly due to a tough macroeconomic environment and rising interest rates. Since all REITs out there tend to fund their properties through a mix of debt and equity, the ongoing proliferation in interest rates can result in significantly growing interest expenses over time, thus affecting the sector’s earnings prospects.
Another effect of rising interest, especially when it comes to REITs, is a higher cost of equity, which has been one of the biggest contributors when it comes to SPG stock’s relative underperformance.
Despite these hurdles, Simon’s operating and financial performance keeps improving by the quarter, with its iconic properties drawing growing retailer interest and customer foot traffic. This was evident in Simon’s most recent Q1 results, with revenues rising by 4.2% to $1.35 billion.
The increase in revenues was driven by the post-pandemic recovery in the retail real estate industry persisting, strong leasing momentum, and improving occupancy levels. In fact, occupancy was 94.4% at the end of the quarter, implying an improvement of 110 basis points compared to the prior-year period.
SPG took advantage of its improving rent revenues and operating metrics to push profitability higher. Its portfolio’s net operating income (NOI), which includes its domestic and overseas properties, advanced by 3.9% compared to Q1 2022. Accordingly, FFO/share (funds from operations per share, a cash-flow metric used by REITs) rose by four cents to $2.74.
The fact that Simon was able to produce improving results during such a volatile market is a true reflection of its management’s prowess to steer the company through challenging times. It’s impressive that SPG was also able to secure an average base rent of $55.84 per square foot for the quarter, which not only exceeds industry standards but also represents a notable 3.1% increase from the previous year.
The cherry on top of SPG’s Q1 results, however, was that management boosted its previously provided financial guidance. The company is now anticipated to post funds from operations per share between $11.80 and $11.95 in Fiscal 2023, an increase from $11.70 to $11.95 previously. The midpoint of management’s guidance essentially points toward a stable performance compared to Fiscal 2022 – a victory that few REITs will be able to claim this year, given the recent unfavorable developments in the sector.
Dividends Keep on Rising
SPG’s financial success would mean little if it didn’t lead to rising dividends. After all, dividends embody the main appeal that tends to draw investors to REITs.
To provide more context here, it’s worth noting that Simon made the decision to slash its dividend during the pandemic. This was a result of the detrimental impact of COVID-19 on the industry, as many retailers had to shut down their businesses. Since then, however, the company has hiked its dividend multiple times — seven to be exact. Along with its Q1 results, Simon increased its dividend to a quarterly rate of $1.85, implying a 2.8% boost quarter-over-quarter or an 8.8% boost year-over-year.
The gripping aspect here, which will also determine the sentiment for Simon’s investment case moving forward, is whether the noteworthy consecutive dividend hikes can be upheld. In my view, given that the $7.40 annualized dividend rate implies a comfy payout ratio of 62% at the midpoint of Simon’s increased guidance, it seems likely that the company can maintain these upward trends in dividends.
In fact, it is possible that they will continue until the quarterly rate reaches pre-pandemic levels of $2.10 per quarter, as it would mark the company’s total comeback from the COVID-19 pandemic.
Is SPG Stock a Buy, According to Analysts?
As far as Wall Street’s view on Simon Property Group goes, the stock has earned a Moderate Buy consensus rating based on eight Buys and four Holds assigned in the past three months. At $133.68, the average SPG stock price target implies 25.4% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SPG stock, the most profitable analyst covering the stock (on a one-year timeframe) is Derek Johnston from Deutsche Bank (NYSE:DB), with an average return of 31.87% per rating. See below.
The Takeaway
SPG continues to deliver impressive results amid a challenging market environment, demonstrating the high-quality nature of its properties and management team. With shares yielding an attractive 7%, room for further dividend hikes, and the stock trading at an inexpensive valuation (price/FFO of 9x at the midpoint of management’s guidance), I believe that Simon’s investment case remains quite compelling. Hence, I remain bullish on the stock.
