If a stock trades at $100 per share and pays a $1-per-share annual dividend, its dividend yield is 1%. Many investors are looking for dividend stocks with a yield better than 1% and use stock screens to find opportunities yielding a desired percentage. But if you're using a stock screener to find extremely high-yield dividend stocks, you may have accidentally overlooked Tanger Factory Outlet (SKT 1.53%).
Tanger Factory Outlet's current dividend yield is around 3.6%, which is quite good. But in this video from Motley Fool Backstage Pass, recorded on Nov. 1, Fool contributors Jason Hall and Jon Quast explain how the company's dividend could go up significantly in the future. And if this happens, those who buy today will have an even better dividend yield on their cost basis -- a forward-looking insight that a simple stock screener can't provide.
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Jason Hall: What is Tanger Factory Outlets? Let's start there. This is a company ticker S-K-T. Tanger Factory Outlet owns Premium Outlet Centers. These are open-air properties, strip mall in their nature with their outlet centers. The discount outlets, we've all been through them.
What makes this company really compelling to me? To start with, Tanger went through some of its troubles, going back about four or five or six years ago where it had gotten a bit bloated. There was some large a lot of acquisitions over the years and ended up at a point where it owned some really good properties and then a bunch of junk. It needed to separate the wheat from the chaff. Its balance sheet had gotten a little bit bloated. The company had largely gone through most of that, before the coronavirus pandemic lockdowns happened, it shutdown so much of the retail world.
The good thing was the company has already gone through a lot of that trouble and offloaded those less attractive properties. Cleaned up its balance sheets to a large extent. It put it in a great position that when the world locked down, management moved fast, they moved really fast. They tapped every single line of credit that they had for the most part. Cashed them out, got that cash in the bank, cut off the dividend for the time being and said, "Look, we need to preserve our capital. We don't know what's going to happen."
They made that move. The stock, of course, cratered, like most real estate, retail real estate stocks did, and so many others stocks of their customers did when this forced shutdown happened. I loaded up when they did that. There's a lot of the same thesis for Ryman. This is a business that had a plenty strong enough balance sheet, tons of cash, was able to cut operating costs. Pretty substantially, didn't have a ton of debt that was going to mature that put it at risk of insolvency and put it in a good position to be able to make it for multiple years with substantially reduced cash flow. And what happened? Things opened up much faster than we expected. And Tanger's customers, which are largely publicly traded, well-established, well-capitalized retailers, restaurants, clothing and apparel manufacturers, electronics manufacturers. Those companies, were still paying rent.
Their cash flows were far less affected than we expected. As a result, the company's business held up quite well and it didn't have to take a lot of that cash when it tapped its revolving debt, it didn't have to start spending that cash to cover its operating expenses. It did a little bit, but quickly it moved through that period.
Now, where does Tanger stand today? If you go back five years ago, it's market cap is much lower. Now that's largely because it's sold off a lot of those properties. It's revenue generating potential is lower, but the quality of its operations are far stronger. I think it's positioned now that over the next five years it could actually return to growth. This is a company that could start looking to develop and acquire, top-tier properties that fit within its niche. One thing we certainly learned is that the real estate that it offers, the retail real estate that it offers is very compelling and largely e-commerce resistant. People love a good deal. These are experiential properties too, where people aren't just going to buy things. They're going to different experiential events that they're starting to have, those retail at their mall.
There's a lot of things that are working in their favor. The traffic counts have largely recovered. The dollar-per-square-foot metrics of the sales at the properties have largely recovered, they actually reimplemented their dividend. As they continue to return that dividend to prior levels, the yield on cost even at today's share price, it's very compelling to me in terms of this being a total return story that I think could do really well.
Oh boy, here comes.
Jon Quast: Yeah, I'm just pulling it up here, Jason, since you are talking about it. This dividend that was for the most part steadily growing over the past 10 years and drop-off in the pandemic. But restated the dividend here, they can get those cash flows back to what they were and they can start returning that dividend back to what it was. This is a really interesting story here at what it is right now.