Real estate investment trust (REIT) Federal Realty Investment Trust (FRT) marches to its own drummer in many ways. And that has served the company and its investors very well for over five decades, though the company has at times been a little out of step with the broader REIT group. In the end, though, it has proven that its approach works. Here's a primer to help you understand why Federal Realty is such a great dividend stock and decide whether or not it's worth putting on your buy list today.
Start with the dividend
A great dividend stock should have a great dividend record. And Federal Realty's streak of 52 consecutive annual dividend increases certainly counts as that. In fact, that streak puts it in very rare company, including iconic names like CocaCola and Procter & Gamble. It has, obviously, maintained that streak through multiple economic cycles, including the deep 2007 to 2009 recession when many other REITs ended up cutting dividends or holding their payouts steady to preserve cash.
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The actual dividend growth each year is also important. Federal Realty has upped its dividend at a compound annual rate of around 4.5% over the past decade. That beats the historical 3% annual increase in inflation over time, and means that the buying power of the dividend has grown. The most recent increases wasn't quite that large, but dividend hikes ebb and flow over time, so it's better to look at the longer-term picture. For example, over the entire 52-year streak, the average annualized increase was roughly 7%.
As for the company's business, management prefers to focus on a smaller number of assets (roughly 100) that it knows well -- and, importantly, that it can invest in to increase their value. The core of the portfolio is shopping centers, but Federal Realty is increasingly working on mixed use properties (33% of rents) that incorporate retail, housing (it owns around 2,600 apartments), and office/work space. It also tends to focus on the most desirable U.S. markets, like Boston, New York, Washington D.C., and Los Angeles, among others. Roughly 85% of its assets are in markets with high median household incomes ($85k or more). Its assets are 94% leased today, and it has been able to increase rents about 10% on average of late, offering notable internal growth. That, of course, is on top of redevelopment efforts, which increase rents and the value of its properties (it is currently upgrading multiple properties, with plans for more investment in the future).
Financially speaking, the REIT has an investment-grade-rated balance sheet. The vast majority of its debt is at the corporate level, meaning that most of its properties don't carry mortgages. Long-term debt is roughly 50% of the capital structure, which is reasonable for a company that owns a large portfolio of physical assets. It covers its interest expenses by around 3.2 times today, which is a solid, though not spectacular number. However, it is notably higher than the closer-to-2-times in 2010 or so. All in all, Federal Realty is on solid financial ground. The key funds from operations (FFO) payout ratio, meanwhile, is a very reasonable 66%.
All in all, Federal Realty is a great dividend stock. But don't rush out to add it to your portfolio just yet.
No secrets here
Federal Realty's stock has been underperforming of late, up just 10% or so in 2019, compared to a 23% gain in Vanguard Real Estate ETF, a decent proxy for the broader REIT space. Federal Realty is also about 23% below its 2016 highs. So Wall Street has put the REIT in the dog house in recent years. However, if you pull back the lens to around 2005 (about when Vanguard Real Estate ETF started to trade), Federal Realty's stock is up more than twice that of the broader REIT peer group. So the recent underperformance is interesting, but the long-term trend is still material outperformance.
Clearly, investors are well aware of Federal Realty's long-term track record and still-strong underlying business. The REIT's price to management's projected 2019 FFO ratio, like a P/E for an industrial company, is nearly 21 times. That's high in the REIT space, and is more inline with what you might expect from a growth company -- not an REIT known for slow and steady dividend growth.
The dividend yield, meanwhile, is notably higher at 3.2% than what you would get from an S&P 500 Index fund. But it isn't exactly a huge yield, and is pretty much in-line with the REIT average. And while the yield is toward the high end of its recent history, it's not high for Federal Realty when you look back over its longer-term history.
FRT Dividend Yield (TTM) data by YCharts
Overall it's hard to call Federal Realty cheap today. As famed value investor Benjamin Graham has noted, even a great stock can be a bad investment if you pay too much for it. And that appears to apply to Federal Realty today.
Wish list this one
Without a doubt, Federal Realty is a great dividend stock. In fact, when it comes to dividends, it has a history that few companies, let alone REITs, can match. Add in a strong business model and a solid financial foundation, and there's plenty of reason to like the REIT. But everyone on Wall Street knows that. With what appears to be a fairly rich valuation, this great dividend payer belongs on your wish list, not your buy list today.
