The market can sometimes overlook the value of stocks that have strong earnings and great dividends, and it's usually because investors don't think the current business will grow over the long term.
We asked three of our investors for great dividend yields that trade at a great value and Tanger Factory Outlet Centers Inc. (SKT 0.53%), AT&T Inc. (T 1.88%), and Pattern Energy Group Inc. (PEGI) were at the top of the list. It would be easy to think these businesses may decline in the long run, but here's why we think the future is bright for all three.
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A REIT unfairly crushed in the retail sell-off
Leo Sun (Tanger Factory Outlet Centers): Shares of Tanger fell 30% this year, amid seemingly endless concerns about the retail sector. Yet that sell-off wasn't justified, since Tanger is actually a real estate company that rents out its outlet centers to other companies.
Therefore, as long as Tanger keeps collecting the rent and occupancy rates remain high, its business will keep growing. Tanger owns 43 outlet shopping centers across the U.S. and Canada, and its properties are leased to over 3,100 stores.
Last quarter, revenue rose 7.4% annually. It had an occupancy rate of 96.1%, its average base rental rate rose 7.9%, and it hiked its average rent by 10.1% on renewed leases in the first six months of the year. Those figures indicate that its outlets should keep bringing in business owners and shoppers for the foreseeable future.
Analysts expect Tanger's revenue to rise 4% this year, but its earnings could fall 13% this year on new outlet openings and remerchandising costs before rebounding next year. As a real estate investment trust, Tanger is required to pay out most of its taxable income (not earnings per share) as dividends.
As a result, it pays a hefty forward yield of 5.7%, which is supported by a payout ratio of 88%. It's raised that dividend annually for 24 straight years, which means it will become a Dividend Aristocrat if it hikes that payout next year. Tanger trades at just 12 times earnings, compared to the industry average of 19 for discount stores -- making it a very undervalued income play.
A high-speed, high-yield dividend
Travis Hoium (AT&T): One business that's going to enter a new phase of growth in the coming years is telecommunications. 5G networks will bring millions of more connections to cellular networks and the market doesn't seem to appreciate just how big of an opportunity these new innovations bring to a company like AT&T.
The telecommunications giant already has one of the top two cellular networks in the U.S., giving it pricing power over smaller rivals like Sprint and T-Mobile and creating a cash flow business. Its scale is its biggest advantage, something you can see in the net capital assets AT&T has compared to Sprint and T-Mobile.
T Net PP&E (Quarterly) data by YCharts.
Size is an advantage now and will give AT&T a lead over rivals as 5G networks roll out. Right now, the company is generating about $16 billion in free cash flow and the company's market cap is a reasonable 14.6 times free cash flow. Its 5.3% dividend yield is a strong yield for investors at today's price.
I will note that today nearly all of the cash generated from the business is used to pay the dividend, which could be a concern if the trend continues. But with 5G being rolled out across the country and new technologies like autonomous vehicles, virtual reality, and smart grids waiting to be rolled out on top of the faster wireless speeds, I think there's a lot of room for growth long term.
AT&T isn't going anywhere, and its high dividend yield is a great value for investors getting into telecommunications today.
A dividend growth stock that's safer and cheaper than you think
Jason Hall (Pattern Energy Group): One of the best places to find dividend growth over the next couple of decades is in "yieldcos," companies that own energy projects, generally renewables like solar and wind, and sell the power. The catch is that GAAP accounting can make a solid yieldco -- like Pattern Energy -- look like a money-losing dividend trap just waiting to spring.
Pattern Energy trades for 75 times earnings at recent prices, but that's a bit skewed by substantial noncash expenses tied to the company's capital growth spending. CAFD, or cash available for distribution -- which uses cash from operations and then factors in cash expenses such as maintenance capex, debt payments, and others, and excludes many noncash items that are part of GAAP earnings -- is a better metric to value Pattern Energy today.
Management projects $152.5 million CAFD at the midpoint of guidance, or $1.74 per share, in 2017. At recent prices, Pattern Energy trades at 15 times CAFD. This is also substantially more than the $1.67 per share the company is on track to pay in dividends this year, making its payout quite dependable. For the long term, Pattern may be as safe an investment as you'll find, with contracts of 20 or more years in place to sell most of its power.
So don't let Pattern's 6% yield and 75 times earnings lead you to the wrong conclusion. It's a solid business with dependable cash flows and a wonderful yield, trading at a very fair price.
