Simon Property Group (NYSE:SPG) proudly announced its eighth post-pandemic dividend increase along with its fiscal Q2 results, which could signal further upside potential. Even though the retail real estate giant’s stock is currently trading at double the levels of its pandemic lows, I believe there is significant potential for further gains. This is because the constantly rising dividends, combined with SPG’s hefty 6.4% yield, are likely to raise income-oriented investors’ interest in the stock. Hence, I am bullish on SPG.
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Fiscal Q2 Results – Strong Results Despite Macro Headwinds
Simon’s ability to consistently raise its dividend wouldn’t be possible if it weren’t for its strong results, which have persisted despite the ongoing macroeconomic headwinds. The current landscape has been pressuring all REITs, especially those specializing in retail. This is because, besides all REITs assuming increased interest expenses, retail REITs are also likely to face further struggles when consumer spending is under pressure.
Yet, Simon’s top and bottom-line metrics continue to advance higher. In my view, this is attributable to its high-quality properties, which are able to attract high foot traffic consistently and produce industry-leading cash flows. Evidently, in its fiscal Q2 results, SPG posted revenues of $1.37 billion, up 7.0% compared to Q2 2022. The increase in revenue reflected a lasting recovery in retail real estate, strong leasing activity, and rising occupancy levels.
Indeed, occupancy was 94.7% for the quarter compared to 93.9% at the comparable period last year, an increase of 80 basis points. Because of the strong demand for its properties, SPG was also able to achieve stellar leasing rates, with its base minimum rent per square foot rising by 3.1% year-over-year to $56.27.
Backed by rising revenues, portfolio NOI (net operating income), which comprises domestic and international properties and Simon’s investment in Taubman Realty Group, rose by 3.7% compared to last year.
Of course, similar to all REITs that carry notable amounts of debt on their balance sheets, SPG is not immune to rising interest rates. In fact, interest expenses jumped by 16.4% year-over-year to $218 million, resulting in funds from operations per share (FFO/share, a cash-flow metric used by REITs) falling by three cents to $2.88.
Nevertheless, due to its strong operating performance, Simon’s management raised its prior guidance, forecasting FFO/share to land between $11.85 and $11.95 (up from $11.80 to $11.95 previously).
SPG’s Post-Pandemic Dividend Growth is Commendable
The factor that has particularly caught my attention regarding Simon’s investment case is the company’s post-pandemic dividend growth streak, which I find quite commendable. This was once again the case following the company’s most recent results, which were strong enough to allow for another dividend hike.
Plumbing the depths of context, it’s important to highlight that SPG took the pivotal step of slashing its dividend amid the pandemic. This move was a direct response to the adverse effects of COVID-19 on the industry, as numerous retailers were essentially forced to suspend their operations. However, the company’s portfolio of prime locations was able to rebound vigorously, allowing its dividend to rebound swiftly as well.
In particular, SPG has not just reinstated its dividend growth, but it has done so with impressive enthusiasm, raising it on no fewer than eight occasions since its reduction in Q2 2022. Bolstered by robust Q2 results that delivered a strong bottom line, Simon once again elevated its dividend, setting it at a quarterly rate of $1.90. This marks a 3.7% increase on a quarter-over-quarter basis and a substantial 8.6% upswing when viewed on a year-over-year basis.
The pivotal factor at play, which will significantly shape the sentiment surrounding Simon’s investment case going forward, pertains to the sustainability of its remarkable streak of consecutive dividend hikes. Considering the $7.60 annualized dividend rate, which corresponds to a reassuring payout ratio of 64% based on the midpoint of SPG’s guidance, I believe there is a strong chance that the company will sustain its dividend growth, an aspect that income-oriented investors are likely to highly appreciate.
Is SPG Stock a Buy, According to Analysts?
Regarding Wall Street’s view on Simon Property Group, the retail REIT has attracted a Moderate Buy consensus rating based on five Buys and six Holds assigned in the past three months. At $127.90, the average SPG stock forecast implies 7.7% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SPG stock, the most accurate analyst following the stock (on a one-year timeframe) is Derek Johnston from Deutsche Bank (NYSE:DB), featuring an average return of 35.64% per rating and a 60% success rate. Click on the image below to learn more.
Final Thoughts
In a challenging macroeconomic environment for retail real estate, Simon Property Group has weathered the storm and showcased impressive resilience and growth. Its consistent dividend increases in the post-pandemic landscape speak volumes about the company’s financial health and management’s confidence regarding its future.
With strong Q2 results reflecting robust leasing activity and rising occupancy rates, coupled with an impressive streak of eight dividend hikes, 6.4%-yielding SPG stock remains a compelling investment choice, in my view. The sustainability of its dividend growth offers promising prospects to income-oriented investors, who will likely appreciate the retail giant’s endurance and commitment to creating shareholder value.
