It's not all doom and gloom in the retail industry. While many retailers are struggling with too much inventory and rapidly shifting consumer behavior, Tanger Factory Outlet Centers (SKT 0.07%) is confident enough to dole out more cash to shareholders.
Tanger raised its dividend by 10% on Tuesday, bumping up the quarterly payment to $0.22 per share. That works out to a dividend yield of about 5.7%.
A retail stock for a recession
Tanger is a real estate investment trust that operates 37 upscale outlet centers in the U.S. and Canada. These centers are mostly open air, and 90% of them are either in a top 50 metropolitan statistical area or near a major tourist destination. Many of them are in the South and Southwest, where winter weather isn't much of an issue.
Tanger certainly isn't recession proof, but the company offers the kind of value proposition that resonates with consumers when the economy takes a turn for the worse. And for retailers, Tanger's outlets offer a way to sell discounted merchandise without tarnishing brands.
Here's a chart of Tanger's revenue over the past few decades:
SKT Revenue (Quarterly) data by YCharts
A big drop in 2020 stands out, but that was due to lockdowns and store closures during the early days of the pandemic. It's more useful to look at how Tanger performed during the financial crisis of 2007 and 2008.
There was no noticeable impact on Tanger's revenue during the biggest economic upheaval since the Great Depression, and funds from operations remained healthy. Part of the reason for Tanger's success during this period was its diversified base of financially resilient retailers. Unlike a shopping mall anchored by struggling department stores, Tanger doesn't put all its eggs in one basket.
Today, Tanger's largest tenant accounts for just 5.9% of its annualized rent, and around two-thirds of rent comes from tenants outside of the top 10. The top 10 includes brands like The Gap, Nike, and Under Armour.
Given this performance, Tanger's confidence in its ability to safely pay a larger dividend seems well placed. Even if the U.S. economy goes through a severe recession, Tanger's results should hold up reasonably well.
A bargain REIT
Tanger will likely feel some pain if a recession does strike, but the stock is already priced pessimistically. The company expects to generate adjusted funds from operations as high as $1.79 per share this year, which puts the price-to-FFO ratio below 9. FFO is still recovering from the pandemic as Tanger works to push occupancy rates higher, so there's plenty of room to grow that profit metric over time. Tanger's occupancy rate sits just below 95% right now, a few percentage points below historical levels.
Tanger is turning to non-retail tenants to further diversify its rent base and make its outlets more desirable for consumers. This includes adding food, entertainment, and digitally native concepts. The company is also looking to grow non-rental revenue generated from marketing partnerships. A recession may slow down these efforts, but they should make the company even more resilient in the long run.
The retail industry and recessions generally don't mix, but Tanger is an exception. With a bigger dividend and a history of successfully riding out severe economic storms by providing consumers with name-brand bargains, Tanger should be on the radar of every value and dividend investor.
