Buy Simon Property Group as a Best-In-Class Play
The long-term narrative for many malls, particularly enclosed regional malls, is still bleak. But investing in this sector is an an example of quality...
Simon Property Group (NYSE:SPG) is expected to deliver a strong earnings report after the market closes on August 2. The expectation is for the company to report earnings per share of $2.37 on revenue of $1.14 billion. And the whisper number suggests that Simon Property Group will report earnings per share of $2.47.
The reason for what will likely be a stellar report is obvious. Simon Property Group is a real estate investment trust (REIT) that is heavily invested in malls and other commercial property. And during the second quarter, mall traffic increased throughout the country as the Centers for Disease Control (CDC) issued new guidance that prompted states to relax remaining Covid-19 restrictions.
Like many things, this is an example of quality mattering a great deal. The long-term narrative for many malls, particularly enclosed regional malls, is still bleak. But in many pockets of the country, mall traffic is coming back. And Simon is the owner of many of these high-performing malls.
And that's one reason SPG stock is a buy. The company has had among the best net operating income (NOI) growth among REITs
Not Just a One-Quarter Wonder
If the strength of Simon Property Group was just in the last quarter, investors would have a reason to be skeptical. But this is a story that's been building since the onset of the pandemic. In fact, SPG stock is up over 100% in the last 12 months and 53% in 2021 alone. .
And while the company is not suggesting that revenue is back to pre-pandemic levels, the stock currently has a price/fund-from-operations (FFO) ratio that is consistent with its five-year average of 14.6x.
An unexpected catalyst for the company's stock price growth is its strategy to buy up bankrupt retailers. The company had the balance sheet to do it. And in the short term, it is helping keep tenants on its properties. Analysts cheered the unconventional approach initially. However, it remains to be seen if this strategy will benefit the company in the long run.
Will the Virus Strike Back?
As I write this, it seems unlikely that there will be expansive mitigation measures that would prevent businesses from staying open. But it's hard to say what will happen to mall traffic with mask mandates being reimposed in some areas of the country.
And the shift from brick-and-mortar shopping to e-commerce is only going to grow. But this is why quality matters. Like the death of print media, the death of malls may take longer than analysts expect.
In the meantime, Simon is looking at ways to reimagine the mall space to make them more of a destination. One way the company is approaching this is through its partnership with Lifetime Fitness in 20 locations throughout the country.
A 4% Return in a Zero-Interest Rate Environment
It's almost impossible to understate the importance of Simon's dividend. Of course, the tax structure of a REIT obligages it to return money to its shareholders. And this is frequently done in the form of a dividend. However, at the onset of the pandemic, Simon was not immune to its financial pressures and cut its dividend by just over one-third.
However, in June the company announced a 10-cent dividend increase (about 10%). That puts the annual dividend at $5.60. When combined with a yield that is at 4.30% as of this writing, SPG is among the best options for investors looking for the income that dividends provide.
SPG Stock Looks Like a Buy
SPG stock has a favorable technical story. The stock has been consolidating lately and volume has remained steady. A bullish earnings report is likely to provide the momentum needed for the stock to push past what has been a level of resistance around $130.
Recent analyst sentiment has also been very bullish. Six analysts have raised their price target for SPG stock since June.
Simon Property Group is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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