Simon Property Group: The Dividend Says Buy More
Summary
- SPG has had two good quarters and raised the dividend for the second time.
- Brick and Mortar retail valiantly fights to remain not dead.
- The dividend is worth a lot more than the price to get it.
What did I think last time?
I last wrote about Simon Property Group (NYSE:SPG) back on March 7. I liked the price and the dividends that the price bought me. At the time lots of people were very concerned about how malls would perform. There was a lot of talk about retail brick and mortar being dead. I didn’t believe that then and presented data in the article to back up the claim that high quality malls were far from dead. Since that article, the price of SPG has declined. In fact today’s market price is about $12 below the price when I wrote the article. I still think SPG is a good investment partner and an even better value today.
What new information do we have now?
This YChart helps present a realistic picture of how dominant e-commerce is in the market today. In my original article, e-commerce sales were about 8.3% of total retail sales in the US. Today that has grown to a whopping 8.5%! Now, I will point out that it is not yet the holiday season, so growth of e-commerce might be slower when stores are less crowded. And there are several retail chains that are in trouble and they will likely be smaller by the holidays if they remain. But this number is still less than 10%. Sure, this is more than enough that retailers who are poorly positioned and already having financial difficulties could be pushed over the edge. But clearly the death of brick and mortar retail has been and still is greatly exaggerated. To paraphrase a tag line from a late night comedy show from the late 70s (although a pale version is still around today), brick and mortar retail is valiantly fighting to remain not dead.
Since I wrote about it SPG has issued 2 quarterly reports. The earlier one, Q1, is here. The report came in pretty much at expected values, with FFO being 11 cents higher than a year ago. My big takeaways were that occupancy was 95.6% and full year FFO guidance was $11.45 to $11.55. The dividend was $1.75 a quarter.
The Q2 report came out on August 1. At first blush the FFO which came it at $2.47 seems to be below last years $2.63. However, that $2.47 figure includes a charge of 36 cents for early extinguishment of debt. From the press release, it looks to me like they paid off some $1.85 billion of bonds and paid for it by issuing $1.35 billion of new bonds with a lower coupon and $573 million of mortgages at an interest rate better than the bonds they paid off. So despite the charge, that looks to me like management bettered the financial position of the company by putting a big dent in the interest expense. I like that full year FFO guidance was improved 4 cents if you ignore the refinance charge. I also like the word "extinguishment" and while I won’t actually pay more for the stock because management gave me a reason to use it, it’s still cool.
The best thing, of a lot of good things, in the Q2 report was that the dividend was boosted another 5 cents to $1.80. That means for the 2017 year (provided the next two dividend payments are $1.80) the dividend will be $7.10. Last year the total dividend payments were $6.50 for a total year over year increase of ~9%. Much more than the 6% I used in calculating a value for SPG.
What’s a good price?
To figure out a good price, I do a DDM calculation using my Excel® based DDM calculator (pictured below, you can see the web-based calculator I based it on here and read a discussion on how the formulas were developed here). I also found this discussion of DDM, and note that in the article the author uses a discount rate of 5%.
Looking at the David Fish’s CCC List (which contains a data on companies that have raised their dividend each year for 5 or more years) I see that SPG’s current dividend increase streak is 8 years. One thing to note and like is that SPG has a habit of raising the dividend at the start of the year, and then again at the middle of the year. I want to be pretty conservative in finding a value for SPG, so I will use the dividend payment to be expected in 2017 rather than annualizing the current payment. Last time I used a dividend growth rate of 6.06%, but I will just round that to 6%. Since analysts are expecting earnings to grow by more than 9% a year for the next 5 years, I continue to think that is reasonably conservative. Using that rate, next year the dividend raises would be 7 cents at the start and 3 cents more for the second increase.
So because of the increase in dividend, DDM shows the NPV of the future dividend payments being $196.62 for a buy price of anything under $197. If one looks at the 4 year average of the yield, and uses that to compute a price, it comes out to $227. So my DDM number looks pretty low comparatively. I think however that it is about right, because I think for a lot of that time period SPG was over-valued because of its high dividend payment.
Can options help?
One thing to keep in mind is that if you use option contracts, you are risking that you won’t get the shares and you are trading away much of the upside of the stock to get a premium payment. With my calculation of the NPV of the dividends being so much higher than the current market price, it might not be worth the extra cash or better potential price to use options. Keeping that in mind, the August monthly expiration date offers some possibilities. Keep in mind that this happens 3 days after the ex-dividend date for the stock and that this event has already been priced into the options.
I think the premium on the $165 strike price put is very good compensation for keeping $16.5K idle in your account for 11 days. If you get the shares you’ll miss the next dividend payment of $1.80 but the premium (use a limit order given the size of the bid/ask spread) should more than make up for it.
None of the calls have much of a premium near my buy price (that is to be expected when the buy price is 15%, or more, higher than the current market price). However, if you have a cost basis of less than $170, the call with the $170 strike price has a Delta of only 0.26, so it might be worth the risk of the shares being called away to write that call and collect the premium.
What to watch for going forward?
SPG just took a big charge to because they paid off a bunch of bonds by issuing lower cost debt. Going forward I want to see how that effects FFO. I expect lower interest expenses to increase FFO, so I will look for that. For the rest, management has given guidance on 2017, so I want to see them hit those numbers (or even do a bit better).
Conclusion
SPG has declined in price, but not because the company isn’t performing. In fact it’s doing quite well. And management is able to do things like swap out debt for lower cost debt. With a second dividend increase this year, I think the dividend is worth quite a bit more than the share price at this time.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. The price I call fair valued is not a prediction of future price but only the price at which I consider the stock to be of value for its dividends.
This article was written by
Beginning on October of 2018 I began working with Rida Morwa and his team at HDO. I both write articles in collaboration with the HDO team and on my own. Contributing authors, if any, will be listed after the bullet points at the start of articles.
My profile picture is an actual picture of me and 4 of my siblings from 1971. I am 9, and the one in the greenish shirt saluting (to keep the sun out of my eyes). My siblings are 8 (brother at far right), 7 (blond sister), 6 (sister in the red shirt) and 3. My grandfather is holding my youngest brother. In this picture, my grandfather is about 4 years older than I currently am.
I have been a software engineer developing applications in various fields for over 30 years. I began investing in mutual funds for my 401(k) back in 1988.I started investing outside of my retirement account a little over 17 years ago. I used to follow a value oriented strategy, but after I saw how that worked less well than I liked during the financial crisis, I began to switch over to a more income based approach.
I had always thought that dividends were important but didn't have a systematic way to evaluate stocks that paid them until I found SA and DGI. Starting around 2010, I have switched my portfolio to a DGI strategy.One of my most profitable picks turned out to be Freddie Mac, which I originally chose because I liked the dividend and because I once worked there. When it first ran into problems I increased my holdings because it still looked like a good value to me. I eventually managed to buy several thousand shares at a cost of $0.50 (I knew that was a good value) and eventually exited the stock at a price that was $5 a share above my average share cost.
My biggest miss was when I sold out my 100 shares of Apple shortly after Steve Jobs returned but before he had done much to improve the companies outlook. You can see my holdings here :
https://seekingalpha.com/instablog/5663201-pendragony/5279959-dividend-growth-portfolio-summary-page
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.