Buy SPG for the Dividend Growth, Not the Value

SPG is a well-run company with superior dividend growth

Simon Property Group Inc (SPG) has plenty of things for investors to like. SPG has a nice pipeline of new and expansion projects underway, and overall rents are rising, as demonstrated in last quarter’s earnings. And with the spinoff of SPG’s lower growth and physically smaller assets to Washington Prime Group (WPB), SPG will better be able to focus on owning and growing premium retail outlets in the U.S .and the rest of the world.

The Washington Prime Group spinoff also released a significant amount of mortgage debt, leaving a cleaner balance sheet and the ability to funnel a greater share of earnings back into higher growth properties or take on new debt to accomplish the same goal.

SPG is a good play for investors looking for dividend growth, but I would not count on significant price appreciation given its current valuation.

SPG Stock Has Had a Strong 2014

Simon Property Group Inc (SPG) is a Real Estate Investment Trust (REIT) that develops and manages retail real estate properties consisting primarily of malls, premium outlets and retail lifestyle centers. As of the end of 2013, SPG held 308 income producing properties in the U.S., nine premium outlets in Japan, three premium outlets in South Korea, and one premium outlet each in Canada, Mexico and Malaysia. SPG also owns non-controlling interests in various real estate focused entities in Europe.

In an effort to focus more on SPG’s higher-end mall properties and outlet, SPG announced the spinoff of 98 strip malls and smaller enclosed properties into a new entity which began trading as Washington Prime Group in May.

The move will allow SPG’s previously under appreciated assets that frequently got lost in the shuffle to shine on their own and improve SPG’s overall metrics as well.

For a REIT that focuses on retail mall ownership, the financial strength and growth of its retail tenants and the overall retail industry are two of the most important factors affecting company performance. Excluding the blip in the first quarter of 2014, U.S. retail sales growth has continued to trend upwards at about a 2-3% monthly rate for several years. On average, that is about double the rate of inflation

The growth in its client base has translated into better earnings for SPG with Funds From Operations (FFO), a key measure of REIT performance, increasing to $2.25 in the third quarter, compared to $1.97 the previous year. SPG noted that the 14% increase in earnings was driven by higher base rents, total sales per square foot and increased occupancy rates. In addition, SPG raised its full year 2014 guidance.

Expect Dividend Growth, Not Price Appreciation

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Source: Yahoo Finance

Unfortunately, all the good news has been factored int for SPG stock.

SPG currently trades at a price-to-FFO ratio of more than 20. This can be compared to the historical average S&P 500 Price-to-earnings ratio of about 15. The consensus price target of $191.5 only offers about a 7% premium to the SPG’s current trading range.

SPG cut its dividend during the recession but was able to grow it back again reasonably quickly to its current 2.8% dividend yield. SPG’s 3-year annualized dividend growth rate is 21.4%, with four consecutive years of increases. That growth dwarfs the S&P 500’s historical average dividend growth rate of 5.56% while also outperforming the S&P 500 in 2014.

SPG will benefit from continued strength in the U.S. economy, enhanced by the wealth effect of rising stock prices, which will drive more traffic to its malls and enhance SPG’s top line. However, this growth is already built into SPG’s stock price which currently trades at close to its 52-week high.

For investors looking for a good dividend growth stock, SPG stock is a good buy, but overall return will most likely lag the market in the coming months due to SPG’s lofty valuation.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.

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