Finding cheap dividend stocks often means delving into companies that are working through some sort of problem. The hard part is figuring out if the problems are surmountable or, potentially, terminal. Investors have left Tanger Factory Outlet Centers (NYSE: SKT) and VEREIT (NYSE: VER) in the bargain bin. But you could find good reasons to think these cheap dividend stocks are worth buying when you dig into the details just a little.
The end is nigh, or maybe not...
If you read the headlines today, it's hard not to notice the troubles facing retailers like Sears and J.C. Penney, among many others that are either struggling or have ceased to exist (like Bon Ton or Toys R Us). The problem even has a catchy name: the retail apocalypse. Sounds really frightening, but it's mostly hype. What's really going on is just a shift in the way consumers are shopping. The retail sector is simply working through a difficult adjustment period.
Image source: Getty Images.
Tanger, which owns 44 outlet centers, hasn't been immune to the pain. But its properties are vastly different from the enclosed malls at the center of the storm. There are a few key reasons that Tanger is different. First, its properties don't have giant anchor tenants, the loss of which generally reduces foot traffic, leaves a hole in the rent roll, and can be difficult (and expensive) to replace. Second, outlet center rent costs tend to be relatively cheap for lessees, making it far easier for Tanger's lessees to make money. That, in turn, makes lessees want to stick around. And third, Tanger's outdoor properties have fairly low costs, both to operate and when it comes to shifting the tenant mix to better serve shoppers.
Far from sitting still, Tanger has aggressively taken on the challenge. It has offered rent concessions to weak tenants to keep occupancy high, which maintains the desirability of its properties for shoppers. At the same time, it's bringing in new stores to improve the tenant mix so it better serves end customers' shifting shopping tastes. But a transition like this takes time. In fact, 2019 is projected to be another year of transition.
But Tanger has plenty of staying power thanks to its strong financials. It covers interest expenses by five times, and its dividend only eats up around 60% of funds from operations, a key industry performance metric. There's little risk of Tanger going belly up or of its cutting its dividend.
Occupancy, meanwhile, remains robust at about 96%. That's roughly in line with industry bellwether Simon Property Group (NYSE: SPG). But here's the interesting part: Tanger trades for around nine times its projected 2018 funds from operations, or FFO, and Simon trades for 15 times its 2018 FFO. Simon's yield, meanwhile, is a tiny 4.4% compared to Tanger's 6.2%. If you can see the silver lining on the clouds at Tanger, it's a cheap dividend stock well worth the risk.
This too shall pass
VEREIT's story is a little more troubling. The REIT, once known as American Realty Capital Properties, burst onto the scene with a series of acquisitions that quickly built it into one of the largest net lease REITs in the industry (tenants pay most of the operating costs at net lease properties). The growth-at-any-cost mentality, however, came at a big cost, which showed up clearly in 2014 when the company announced that it had made an accounting error.
That mistake led to a complete overhaul. Management was changed and the dividend was suspended. The new team in charge, led by industry veteran Glenn Rufrano, quickly got to work streamlining the portfolio, reducing leverage, and reinstating the dividend. It has executed well on every point of the turnaround plan. However, there's one lingering issue that has yet to be fully resolved: the legal fallout from the accounting mess.
That said, VEREIT has settled with roughly 30% of its shareholders at a cost of around $218 million. A little back-of-the-envelope math suggests a high-end figure of $1 billion to settle all of the lawsuits. Investment-grade rated VEREIT has roughly $1.7 billion of capacity on its revolving credit facility at last check. It can handle the hit.
But investors are still worried and, perhaps, rightly, putting the shares in the bargain bin until this issue is fully resolved. With a payout ratio of roughly 75% in the third quarter, the dividend is well covered. The yield, meanwhile, is far above its net lease peers at 6.7%. For reference, industry bellwether Realty Income (NYSE: O) sports a yield below 4%. Meanwhile, VEREIT's price to projected 2018 adjusted FFO is a tiny 11.5 times compared to Realty Income's 22 times.
Image source: Getty Images.
VEREIT is still facing legal risks, but they are getting increasingly well defined. Rents, meanwhile, are handily covering the dividend at a property owner that's pretty much back on its feet. If you can deal with a little legal uncertainty (this is not a set-it-and-forget-it type of investment) as a strong management team continues to work through one of the last issues remaining from the 2014 accounting mess, you can get a big yield at a very cheap price.
Worth the risks
Investing is about balancing risk against reward. Tanger and VEREIT clearly expose investors to risk, but the rewards are fairly substantial when you consider their above-peer yields. Add in low valuations and strong or strengthening fundamentals, and these cheap dividend stocks look like solid buys today. Yes, you'll have to be willing to deal with a little uncertainty over the short term, but the risk-reward balance here looks like it's tilted in favor of shareholders.
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