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Simon Property Group (NYSE: SPG ) recently announced plans to spin off its strip malls and smaller enclosed malls into a new company. That will allow the mall giant to focus on its higher-end enclosed malls and outlets. The move will be a good one for shareholders on multiple fronts, but such transactions don't always play out this well.
Simon is a prime example of an industry leader that took advantage of an economic soft patch to grow. During the 2007 to 2009 recession, the real estate investment trust (REIT) was actively adding to its portfolio, buying competitors like Mills Corporation (2007) and Prime Outlets (2009).
This growth, however, came at a cost. Simon cut its dividend at the tail end of the recession, right when income investors needed it most. Although the dividend is now above its pre-recession level, that investor-unfriendly move left a bad taste in the mouths of people trying to live off of their dividends.
That makes the spin-off of the company's "less desirable" properties that much nicer, since it will be accompanied by an effective dividend increase. Simon's dividend will stay the same, and the spin-off will pay a dividend of its own. A welcome reward if you stuck with the REIT through the tough years.
Losing its way
Of course, industry leaders don't always make the right calls. For example, while Simon was cutting its dividend to foster growth, General Electric (NYSE: GE ) was cutting its dividend to ensure its solvency. GE's leadership let the company's financial arm become disproportionally large compared to its industrial business. When the financial crisis hit, it had little choice but to take a government handout and disappoint investors who had relied on the one-time dividend champion for income.
Today, the company is back on its feet, increasing its dividend again, and planning to spin off its credit card business to reduce the contribution of its finance arm to just 30% of earnings. Earnings, however, are expected to be lower in 2014, and perhaps in 2015, without the contribution from what is estimated to be a $16 billion unit. Although GE is back on track, you'll need to keep a keen eye on the progress of this corporate action.
Change doesn't always work out so well
The thing is, income investors don't always make out so well when big changes are taking place. For example, UDR (NYSE: UDR ) once bought fixer-uppers and upgraded them as a means to increase rents. That model worked well for the company for many years.
After a CEO change, however, the REIT set its sights on high barrier to entry markets. To help the transition to a new model, UDR sold off a large portion of its legacy portfolio. That sale was accompanied by a dividend cut. While UDR is a one of the largest apartment REITs and a well run company, income investors didn't make out so well on that change.
Leggett & Platt (NYSE: LEG ) , best known for making bed springs, is another company making a strategic shift. Over the last few years, the company has been selling off smaller and less desirable operations to focus on growth businesses. That's led to what should be a temporary slowdown on the top and bottom lines and a relatively depressed stock price.
Throughout the shift, the around 4% yielder has maintained its decades long trend of dividend hikes, just at a slower pace. The question now is when will Leggett's business shift get the top and bottom lines moving again? That's what will be needed for dividend growth to shift back into high gear -- otherwise there could be a UDR style cut in the cards.
Change isn't easy
Simon's spin off is a shareholder-friendly move and one that should help remove the sting of its previous dividend cut. However, the company's mixed past shows that income investors need to keep a close eye on dividend payers undergoing big changes, like Leggett & Platt and GE today. Sometimes the result isn't as positive, a fact that REITs UDR and Simon (during the recession) have both proven.
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