Not many companies pay monthly dividends; even fewer of them are REITs. Stag Industrial (NYSE:STAG) is one such REIT that has already established a prolonged track record of reliable monthly payouts. The stock is currently yielding 4.2%, and while shares may trade at a relatively premium valuation, this serves as a testament to its soundness in a tough real estate market during the current rising-rates environment.
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In fact, while the real estate sector suffered during the past year, with Vanguard Real Estate ETF (NYSEARCA:VNQ) down 9% year-over-year, shares of STAG rose by 16% over the same period – a massive outperformance.
In my view, investors are likely to keep appreciating STAG due to its quality property portfolio and the attractiveness of its monthly dividend. At the same time, however, the stock may be only fitting for conservative, income-oriented portfolios, as STAG’s premium valuation could limit investors’ total returns. Accordingly, I am neutral on the stock.
Quality Portfolio Drives Robust Results
STAG Industrial possesses a high-quality portfolio of 561 industrial properties in 41 states with roughly 111.6 million rentable square feet. Its portfolio has managed to perform resiliently since STAG’s IPO in 2011, back when the company owned just 93 properties. This has been the basis of the company’s ability to consistently pay and increase its monthly dividend during this period. But before we talk about the dividend, let’s examine what makes STAG’s property portfolio unique.
For starters, industrial properties (e.g., warehouse/distribution buildings) typically require fewer capital expenditures than other commercial property types, while single-tenant properties (which is STAG’s focus) typically require fewer expenditures for leasing, operating, and capital costs per property than multi-tenant properties.
Further, STAG’s portfolio spans 60+ markets with no market exposure being more than 8% of the company’s ABR (annualized base rent), its tenant base operates in 45+ different industries, and no tenant makes more than 3% of its ABR.
Hence, the portfolio is very diversified, minimizing the negative effect a particular industry that is struggling could have on its aggregate performance. Its tenants are of high quality, too, and include multinational behemoths with very healthy financials. Its largest tenant is Amazon (NASDAQ:AMZN), at 2.8% of ABR.
Importantly, STAG’s management has not only managed to grow and diversify the portfolio over the years but has also made sure that acquisitions have been accretive on a per-share basis. That’s the most important fact for any investor. Specifically, STAG’s FFO/share (FFO refers to funds from operations, a cash-flow metric used by REITs) has grown from $1.44 in 2013 to $2.21 last year, implying a compound annual growth rate of 7.5% over the past decade. This is not a bad result, given the REIT’s consistency.
Despite rising interest rates, STAG’s favorable performance has also been sustained going into Fiscal 2023. For Q1 2023, STAG’s net operating income grew by 7.8%, while core FFO/share grew by 3.8% to $0.55. Management feels optimistic about the REIT’s performance throughout the rest of the year too, as evidenced by its full-year outlook. For FY2023, management expects core FFO/share to land between $2.22 and $2.26, the midpoint of which implies year-over-year growth of 1.3%.
It may sound like an underwhelming increase, but given that most REITs are going to experience declining FFOs this year due to higher interest expenses, STAG’s expectation for further growth is commendable, highlighting the strength of its portfolio.
Is STAG Worth Buying for Its 4.2%-Yielding Dividend?
STAG Industrial has built an impressive track record of dividend growth, with the company boasting 12 years of consecutive annual dividend increases. Admittedly, STAG’s dividend increases have been somewhat soft over the years. The dividend has usually grown by fractions each year, with the company’s five-year dividend-per-share CAGR standing at an uninspiring 0.69%.
The company’s conservative management approach is a key factor contributing to the relatively modest dividend growth rate. STAG Industrial strategically enters into multi-year leases for its industrial properties, prioritizing the stability of cash flows over aggressive rent growth potential. This prudent strategy is reflected in the company’s weighted average lease term of 4.7 years. While this approach limits the frequency of rent hikes, it provides enhanced visibility into cash-flow generation.
Nevertheless, I find the 4.2% yielding dividend to be highly reliable, with the midpoint of management’s guidance implying a forward payout ratio of about 65%. Investors who seek stronger dividend growth prospects may be disappointed by STAG’s conservative approach, but those who seek a relatively notable yield that is paid on a monthly basis and is very well covered are likely to very much appreciate STAG.
Is STAG Stock a Buy, According to Analysts?
Turning to Wall Street, STAG Industrial has a Strong Buy consensus rating based on three Buys assigned in the past three months. At $40.00, the average STAG Industrial stock price target implies 9.3% upside potential.
If you’re wondering 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 Michael Carroll from RBC Capital, with an average return of 11.99% per rating and a 74% success rate.
The Takeaway
Overall, I believe that STAG Industrial features a quality property portfolio and an attractive monthly dividend. The company’s robust performance in a challenging real estate market demonstrates its resilience.
That said, it’s worth noting that the midpoint of management’s guidance implies shares are trading at a price/FFO multiple of about 16, which is a premium multiple. Not only is it notably higher than the 13x median of its industry peers, but it’s also inherently rich, given the company’s slower-than-average dividend-growth prospects.
This is the result of investors willing to pay a premium for the reliable 4.2% yield and the attractiveness of the frequency of STAG’s monthly payouts. Nevertheless, the premium valuation might constrain the potential total returns for investors in the future, making STAG a compelling choice primarily for conservative investors seeking stable income-oriented opportunities.
