STAG Industrial (NYSE:STAG), an industrial REIT, has traditionally increased its dividend every January over the past 12 years, signaling that another hike is likely coming next month. The consideration now is whether this anticipated increase will serve as a significant catalyst for the stock. While STAG remains a solid choice for secure dividend income (yielding over 4%), I believe its upcoming dividend hike is going to be modest and unlikely to significantly impact investors’ returns. Thus, I’m neutral on the stock.
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What’s Supporting STAG’s Impressive Dividend Track Record?
STAG has put out a very impressive dividend track record. Besides the dividend being paid on a monthly basis, a desirable characteristic to income-oriented investors, STAG has managed to increase its dividend for 12 consecutive years. Sometimes, increases have also occurred intra-year, meaning more than once during a 12-month period. STAG’s dividend track record can be attributed to the robust nature of its property portfolio, which tends to generate highly resilient results. Let’s take a deeper look.
STAG’s Property Portfolio
STAG Industrial proudly features an outstanding portfolio of 568 industrial properties spread across 41 states, amounting to an impressive 112 million rentable square feet. STAG’s portfolio has demonstrated remarkable resilience since the company’s IPO in 2011, when its holdings were limited to just 93 properties. But what is it that sets STAG’s portfolio apart, ensuring the sustainability and growth of its monthly dividend?
Firstly, the focus on industrial properties, specifically warehouse and distribution buildings, involves inherently lower capital expenditures compared to other commercial real estate types. STAG’s emphasis on single-tenant properties further contributes to reduced costs for leasing, operations, and capital per property compared to multi-tenant properties.
Additionally, STAG’s extensive portfolio spans diverse markets, ensuring no single market represents more than 7.1% (in this case, Chicago) of the company’s annualized base rent (ABR). Likewise, STAG’s tenant arrangement is highly diversified, with no single tenant contributing more than 3% to its ABR. The largest tenant, Amazon (NASDAQ:AMZN), represents just 2.7% of STAG’s ABR.
Overall, STAG’s portfolio has not only exhibited resilience during uncertain periods due to the mission-critical nature of its properties and intentional diversification across markets and tenants but has also delivered market-beating rent growth. Specifically, the portfolio has achieved a commendable 33.4% rent growth between 2020 and Q3 2023, surpassing the market’s average rent growth of 23.8%.
Strong Rent Growth Supports Continuous Dividend Growth
STAG’s market-beating rent growth has been a major contributor to the company’s ability to keep rising its dividend year after year. The company’s most recent results once again showcased this trend. For the third quarter of 2023, STAG posted rental revenue growth of 8% to $177.9 million.
While the growth in rental revenue during Q3 was influenced by property acquisitions, the strong factor that led to the result was management’s focus on optimizing each property’s lease rate. Showing strong leasing momentum, the company initiated leases on 2.3 million square feet, leading to record cash rent growth of 39.3% and straight-line rent growth of 54.2%.
Notably, as of the Q3 results announcement on October 24th, management had already secured leases for 97.9% of the expected 2023 new and renewal leasing, covering 12.9 million square feet and achieving impressive cash rent growth of 30.1%.
STAG’s strong leasing activity, high occupancy rate (97.6% at the end of Q3), and prudent cost control resulted in the company posting funds from operations per share (FFO/share, a cash-flow metric used by REITs) of $1.71 for the first nine months of the year. This implies an increase of about 3% compared to the equivalent period in 2022.
While higher interest rates have hampered STAG’s FFO/share growth, the fact that its FFO/share isn’t declining, as is the case with most REITs these days, is a testament to the portfolio’s underlying resilience.
Upcoming Dividend Hike Should be Soft, Nonetheless
While STAG has managed to post strong results year-to-date, I believe that its upcoming dividend hike will be soft. This is due to management’s approach having turned increasingly more careful when it comes to dividend growth in recent years to improve STAG’s payout ratio.
For context, STAG’s dividend per share CAGR over the past decade stands at just 3.2%, notably falling behind the growth in FFO/share during this period. Still, management has achieved its goal, as its payout ratio has dropped from a worrisome 97.2% in 2016 to just 64.8% based on this year’s expected FFO/share of $2.27.
Considering these factors, I anticipate that STAG’s upcoming dividend increase will likely hover around 3%. This expectation finds support in both STAG’s historical trend of long-term dividend growth and the corresponding growth in FFO/share during the first nine months of this year. While this boost will undoubtedly be well-received by conservative income-oriented investors holding STAG for its monthly dividend, it’s important to note that it won’t substantially alter the stock’s overall total return potential.
Is STAG Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, STAG Industrial maintains a Moderate Buy consensus rating based on two Buys and two Holds assigned in the past three months. At $38.25, the average STAG Industrial stock price target implies 5.3% upside potential.
If you’re not sure which analyst you should follow if you want to buy and sell STAG stock, the most accurate analyst covering the stock (on a one-year timeframe) is William Crow, representing Raymond James. He features a strong average return of 12.62% per rating and a 73% success rate. Click on the image below to learn more.
The Takeaway
In conclusion, STAG Industrial’s robust dividend track record, anchored by its resilient and diversified property portfolio, showcases its prowess in maintaining consistent growth. The company is likely to increase its dividends again this January, as it has done for 12 consecutive years. In that sense, I see STAG as a reliable choice for income-oriented investors looking to secure monthly dividends.
That said, the upcoming dividend hike shouldn’t notably affect the company’s investment case or its overall prospects, leaving me neutral on the stock.
