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This Stock Yields More Than 6%, and It's Ridiculously Cheap

By Matthew Frankel, CFP® - Updated Feb 16, 2018 at 3:11PM

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Headwinds in the retail sector combined with rising interest rates have pushed this stock to a new 52-week low.

Tanger Factory Outlet Centers (SKT 1.69%) recently reported solid fourth-quarter and 2017 earnings, but investors still seem to be worried about retail-sector headwinds and rising interest rates. The bad news is that the stock has fallen considerably in recent months, and the post-earnings reaction sent it down another 8%. The good news is that this long-term winner now trades for a ridiculously low valuation and pays a 6.3% dividend yield.

Tanger's business is doing better than its stock price suggests

You wouldn't think Tanger's business has been doing well by looking at its stock chart, but you'd be wrong. For starters, Tanger's adjusted funds from operations (FFO), the REIT version of earnings, rose by 4% in 2017, impressive growth considering the difficult retail environment. Even Tanger's same-center tenant sales rose by 1% in the fourth quarter, a metric that has been negative at many other types of retail.

Shoppers walking with several shopping bags.

Image source: Getty Images.

Tanger has also now raised its dividend for 24 consecutive years, including a 5.4% increase in April 2017. I'd be shocked if the company didn't raise it again this year to make it an even quarter-century, especially since the payout of $1.37 per share is well-covered by the company's funds from operations, or FFO. In fact, Tanger's forward FFO payout ratio of just 56% is one of the lowest in the REIT sector.

Why is the stock so beaten down?

To be clear, not everything is going well for Tanger and the REIT sector in general.

For starters, interest rates have risen quite rapidly lately, which has put tremendous downward pressure on income-based investments like REITs. The simplified explanation is that investors expect investments like REITs to pay significantly more than risk-free investments like Treasury notes. When Treasury yields rise, REIT yields also rise, which means prices fall. So it's not just Tanger that's been falling -- virtually all major REITs have dropped lately.

However, Tanger and other retail REITs have fallen because of the headwinds in that sector. And while Tanger's business is still doing well, the effects of the retail woes are certainly apparent. For example, Tanger's 2017 same-center net operating income growth, while positive, was its lowest since 2009.

Don't worry too much about retail headwinds

Many investors are hesitant to get involved with any aspect of the retail sector, and it's easy to understand why. There has been an epidemic of bankruptcies and store closures in the industry recently, and the longer-term effects of e-commerce make investors justifiably nervous.

However, certain types of retail are doing quite well. Discount-oriented or off-price retail is one of these categories, as these businesses tend to offer deals that simply don't exist online. Retailers with an experiential component to their businesses are also doing relatively well, and outlets definitely fit into both of these groups. In-person bargain-hunting is one of the big draws of outlet shopping, and consumers often find unique deals that can't be found on or other online retailers.

Tanger's portfolio occupancy is a great indicator of how e-commerce and recession-resistant outlet retail is. The company finished 2017 with 97.3% occupancy, although this was down slightly from 2016, and the figure hasn't fallen below 95% in its 37 years in business.

Even the company's new outlet center opened in 2017 in Fort Worth, Texas, is already 93% leased, and the majority of Tanger's leases expiring in 2018 have already been renewed.

A great long-term opportunity

While Tanger doesn't plan to deliver a new outlet center in 2018, that doesn't mean opportunities are drying up. Rather, it seems Tanger simply wants to wait out the challenging retail environment for the time being.

The company says pre-leasing and pre-development activities are under way for several opportunities. After all, Tanger is in only 22 states so far, and the outlet-shopping industry is still relatively small and young, and there are many underserved markets throughout the U.S. that represent an excellent long-term growth opportunity. In fact, Tanger estimates that less than 70 million square feet of quality outlet space exists -- for comparison, the leading shopping mall REIT alone owns 243 million square feet of retail space. So it's fair to say that the outlet industry has some room to grow.

In addition, Tanger still has $75.7 million remaining on its buyback authorization, and I wouldn't be surprised to see the company get a bit aggressive with buybacks in 2018, especially if the share price remains so depressed.

Finally, at a valuation of just 8.8 times forward FFO, Tanger is an insanely cheap stock right now. To be clear, the retail headwinds may take some time to dissipate, but when they do, Tanger will be in an excellent position to continue its growth. In the meantime, you're getting into a long-term winner at a bargain, and you're collecting a 6.3% dividend yield while you wait for the tide to turn.

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Tanger Factory Outlet Centers, Inc. Stock Quote
Tanger Factory Outlet Centers, Inc.
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