Shares of Simon Property Group (SPG -0.26%) have gained 16% in the past 12 months, which is in line with the 16% gain of the S&P 500 index during that time.
After such strong performance, this raises the following question: Should investors seeking outsized dividend income buy Simon? Let's look at the company's fundamentals and valuation to decide.
Providing experiences that consumers value greatly
As the world evolves technologically and economically, consumer preferences are constantly evolving with it. A survey conducted by the experiential advertising agency Momentum Worldwide in 2019 found that three-quarters (76%) of consumers preferred to spend money on experiences over material possessions. Such a trend should bode well for Simon: The real estate investment trust (REIT) has its pulse on the desires of the millions of consumers who frequent its 250-plus top-notch mall properties in 14 countries. This is how the company had the wherewithal to begin greatly transforming its malls years ago by adding attractions more appealing to consumers like aquariums, food courts, and restaurants.
It's not exactly a secret that elevated inflation and rising interest rates have eaten into the discretionary income of consumers across the board. But Simon's commitment to providing the most memorable experiences possible for its consumers was able to overcome these challenges. The company's reported retail sales per square foot increased 3.3% year over year to a record $759 in the first quarter ended March 31, 2023. Underlying strength from its tenants helped Simon's funds from operations (FFO) per diluted share edge 1.5% higher over the year-ago period to $2.74 during the quarter.
Thanks to these respectable earnings results, the company's management team was confident enough to raise its FFO per diluted share midpoint guidance from $11.83 to $11.88. For context, this is marginally more than the $11.87 in FFO per diluted share that Simon generated in 2022. As more of the company's projects come online like its upscale outlet center in Tulsa, Oklahoma (set to open in the fall of 2024), this should fuel slow and steady growth.
Image source: Getty Images.
The dividend doesn't look like a yield trap
Simon's 6.7% dividend yield is eye-popping versus the S&P 500 index's 1.6% yield. This could raise the question of whether the payout is at risk of being cut -- fortunately, Simon's dividend seems to be reasonably sustainable for a high yielder.
Assuming nickel increases in its third-quarter and fourth-quarter dividends per share paid, the dividend payout ratio is positioned to register at around 63% in 2023. Coupled with debt issuances, Simon is retaining the capital needed to fund projects to move the growth needle. That is why I expect low- to mid-single-digit annual dividend growth to persist over the medium term.
A stock with room to run higher
Sitting 30% off its all-time high share price of $158 set in August 2016, shares of Simon have meaningfully underperformed the S&P 500 index during that time. This is probably because of the negative perception that malls face to this day. But contrary to the narrative that e-commerce will eat the lunch of malls, Simon continues to prove that best-of-breed mall owners can still thrive from an operational perspective. Shares of the REIT can be picked up at a current-year price-to-FFO per diluted share ratio of just 9.3. That is why shares of the stock are, in my opinion, a buy for income investors at their current $111 share price.
