Breaking News
Investing Pro 0
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data

Simon Property: Is 6% Dividend Yield Worth the Risk?

ca.investing.com/analysis/simon-property-is-6-dividend-yield-worth-the-risk-200538440
Simon Property: Is 6% Dividend Yield Worth the Risk?
By Haris Anwar/Investing.com   |  Nov 28, 2022 13:26
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
SPG
-1.72%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
US500
-1.18%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • After rebounding strongly from pandemic-era market crash, Simon Property’s shares are under selling pressure again
  • With the Federal Reserve adamant to claw back inflation, property owners, like Simon Group, can’t remain insulated from economic headwinds
  • Malls are most exposed to discretionary consumer spending, facing greater challenges when the economy slows

America’s biggest mall operator, Simon Property Group (NYSE:SPG), is offering an interesting risk-reward proposition to investors. While traffic at the company's malls has fully recovered after taking the pandemic-triggered hit, the risk of a recession is making many investors cautious.

These market sentiments are reflected in the Indianapolis-based Simon Property’s stock. After rebounding strongly from the pandemic-era market crash in March 2020, SPG shares have remained under pressure during the past year. They are down about 25% this year, against the 15% weakness in the S&P 500.

Simon Property Group Chart
Simon Property Group Chart

Source: Investing.com

Real estate has a long history as an inflation hedge, based on the principle that income generated by buildings tends to keep pace with consumer prices. But this time, it could be different. With the Federal Reserve adamant to bring back inflation from its highest level in four decades by aggressively hiking interest rates, it’s hard for property owners, like Simon Group, to remain insulated from economic headwinds.

Malls are most exposed to discretionary consumer spending, facing greater challenges when the economy slows. While high-end consumers are still absorbing higher fuel, housing and food costs, low- and middle-income consumers are not, as last year’s government stimulus checks are no longer available to help.

Simon, which is a real estate investment trust (REIT) having the ownership of premier shopping, dining, entertainment and mixed-use destinations throughout the U.S., hasn’t faced such pressures so far.

Mall Activity is Strong

On the earnings conference call last month, Chief Executive Officer David Simon reported that mall activity remains quite strong in the U.S. Sales per square foot for its tenants rose 14% year over year, which is a record. Occupancy for Simon’s malls was 94.5% by the end of September, compared with 92.8% during the same period a year ago. Base minimum rent per square foot was $54.80 for the third quarter, compared with $53.91 a year ago.

While these numbers look encouraging, they don’t show a normal pattern. After the pandemic-related restrictions, consumers are resuming their outside activities, including more visits to malls and other places of community gathering.

If the recession hits with full force next year, as anticipated by many economists, Simon may find it challenging to maintain a strong occupancy rate. A slower economic environment reduces demand for expansion by better retail operators and forces weaker retailers to close their operations.

Due to these risks, InvestingPro’s various models don’t provide a buy signal for Simon stock at these levels. In fact, these models show that SPG stock is trading close to its fair value.

Fair Value Models for Simon Property Group
Fair Value Models for Simon Property Group

Source: InvestingPro

Another big attraction of buying REITs, such as Simon, is their potential for income.

REITs offer investors exposure to the real estate sector, but without the requirement for a large capital outlay or mortgage debt to buy equity in a physical property, while maintaining the benefits of a steady income stream.

But that proposition becomes less attractive when rates are surging. After years of attracting investors chasing yield at a time of rock-bottom interest rates, the equation is changing fast. According to Bankrate.com, investors these days can get up to 4% per annum on a low-risk certificate of deposit (CD) on a three-year term.

Payout History On Low-Risk CDs
Payout History On Low-Risk CDs

Source: InvestingPro

On the dividend front, Simon Property doesn’t have a very impressive track record either. Payouts are still lower than they were before the pandemic after the company slashed them in 2020 to deal with the revenue slump. The mall giant currently pays $7.20 annual dividend, which translates into a 6% yield.

As the mall giant reaps the benefit of a pent-up demand for brick-and-mortar visits, there is a possibility of further dividend increases this year. According to Simon’s latest guidance, comparable FFO (funds from operations) will be within a range of $11.83 to $11.88 per diluted share for the year ending December. That compares to the $12.04 they generated in 2019 when they paid a dividend of $8.30.

But that was the time when interest rates were too low. With interest rates on the rise and other costs escalating, it seems quite tough for the rate-sensitive REIT to distribute more cash among investors.

Bottom Line

Simon Group isn’t the kind of stock that investors should buy when interest rates are rising. Mall operators could come under pressure if the economy takes an ugly turn and retailers start closing their shops. Investing in real-estate stocks is behind us in the current economic cycle.

Disclaimer: At the time of writing, the author doesn’t own SPG shares. The views expressed in this article are solely the opinion of the author and should not be taken as investment advice.

Simon Property: Is 6% Dividend Yield Worth the Risk?
 

Related Articles

Simon Property: Is 6% Dividend Yield Worth the Risk?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email