Buy Simon Property Group Stock For The Future Yield (NYSE:SPG)

CHUNYIP WONG
So many times, I hear that large mature companies just do not have the potential that smaller companies have. Left out of the conversation is the fact that smaller companies often get off track and give up a lot of their gains, or their price gets ahead of their prospects and an investor overpays.
Simon Property Group, Inc. (NYSE:SPG) is one of those mature companies with considerable recovery potential that will likely be added to in the future, along with a dividend that management is restoring quickly to precut levels. The Federal Reserve just hinted at interest rate cuts that should add interest to this issue. An investor with some patience can just wait for the restoration of the dividend to yield a fair amount more than is the case right now, while Simon Management likely continues to build the business so that there will be more dividend increases beyond the old dividend level.
Dividend History
Ever since Simon Management cut the dividend back in 2020, the dividend has been rapidly restored as the business has improved and some worrisome anticipated conditions in the industry have never arrived.
Simon Property Group Recent Dividend History (Simon Property Group Website December 18, 2023)
As shown above, the dividend is nearly back to where it once was. But management has mentioned that they are filling the vacant space and they also raised guidance. The general reason for that guidance raise can be summed up as business is good. With potential interest rate cuts on the way in the next fiscal year, business could stay good or get better.
Simon probably has one of the best-located portfolios in the business. As such, it suffers downturns far less than competitors (usually). That appears to be the case this time around with the rapid restoration of the dividend.
Backing Up The Dividend
The finances backing the dividend shown above have few equals in the industry.
Simon Property Group Credit Profile (Simon Property Group Third Quarter 2023, Earnings Supplemental Materials)
One of the first things to note is that the dividend cut gave the company more financial flexibility that may well have been needed during the pandemic.
However, the restoration of the dividend shows the coverage has improved. The dividend is now roughly within 10% of the older levels, whereas the coverage is considerably better than the 2019 dividend coverage would imply. It does line up better with the 2020 FFO payout ratio. However, business conditions have improved tremendously since 2020.
This would imply that the business has grown somewhat from the challenging year of 2020 as well as the (probably) normal year of 2019. It may also imply that there is room for the dividend to grow above the old level.
This happened even though the interest rate paid as shown above is inching upwards due to the current interest rate environment.
Operations Improve
Management mentioned better lease rates which is going to mean more cash flow. Remember that for the most part, expenses were already paid before rates increased.
Simon Property Group Key Operating Measures (Simon Property Group Third Quarter 2023 Supplemental Earnings Slides)
Since funds flow is a part of revenue, the increases shown above could translate to a greater percentage of funds flow and funds available to distribute to shareholders. That means that the dividend could continue to grow faster than revenue for a while because funds flow is increasing.
Simon has a lot of long-lived fixed assets. The expenses are already paid for. Therefore, any increase in leasing (or rentals if any) will go “straight to the bottom line” with a minimal amount of subtractions as expenses are linked to building maintenance rather than revenues.
Market Attitude
This is in contrast to the market sentiment that has generally put all real estate investment trusts (“REITs”) into the market doghouse. The stock price itself has been discounted to levels seen before the pandemic by as much as 50% (depending upon what price you consider “typical,” that range can be different). The recent rally in the stock price is probably a start of things to come as REITs return to market favor. The stock is still cheap, but not as cheap as it was.
Furthermore, management has been working on improvements. Inflation also helps to raise earnings as well. Most management aim to have better earnings after a down cycle. Plus this management will likely have an expansion project or two from time to time in the future. There could also be more acquisitions.
A lot of REITs, including this one, have considerable recovery potential that normally is not part of the investment consideration. For income investors, the chances of a dividend cut are far smaller when management is rapidly raising the dividend. The stock market still sees the preemptory cut of the dividend just in case things got bad. Actually, now the economy and business is better than many, including management, expected.
During better times, this issue was considered a “steady as you go” type investment. Management is demonstrating that the business still works that way even when the market does not expect it to.
An Income Idea Based Upon Better Times
Many income ideas yield far more and often much safer than some at least some ideas that come up, when they are chosen at a time like this. The market looks at bond yields and does not consider that the time will end when interest rates remain high.
More importantly, things like treasury bills and even highly rated corporate bonds lose value to inflation. Stocks, on the other hand, beat long-term inflation trends even when higher interest rate times are included.
That continues to make Simon a contrarian investment buy as long as the current business trend continues. Even a hiccup or two, that Simon is not known for would not change the story. If anything, a hiccup in this market would likely make the contrarian opportunity more compelling.
What is always needed with contrarian opportunities is patience. Simon can be held by long-term investors right through rising interest rates and now falling interest rates because long-term holders know that the company will do better than the competition in good times and bad times. The outperformance should enable a recovery to higher levels than before the period of challenging interest rates. It is the difference between an “A” rated company and lessor rated companies of similar size.
The Future
Management has discussed projects that should lead to organic growth. My own suspicion is that there will be occasional acquisitions and maybe a spinoff or two to keep the portfolio in top-notch conditions. Timing will always be uncertain.
Good management is often the most important reason to consider an investment. Many times, average management or worse will sabotage an investment in ways investors just did not see coming. Good management, on the contrary will grow the business and find ways to outperform the competition in ways that investors did not expect. Oftentimes, they make it look easy as well.
This issue may well appeal to a wide variety of investors because the stock price is likely to recover as interest rates decline in the future. In the meantime, the dividend still has room to grow to get back to the old rate as shown above. Simon Property Group, Inc. is a strong buy based upon the fact that the location and diversification of the properties are unmatched (for the most part). Therefore, those properties should outperform the industry. That means more dividends for shareholders and probably an eventual share price that exceeds the share price before the pandemic.
Rarely does a company of this stature go on sale. When a company like this does have a lower stock price like it does now, it often means that more risky stocks do not offer a superior risk adjusted return. If they do, it is often not worth trying for that incremental return. “Buy straw hats in January,” as Charles Allmon used to say, applies here.