Market Commentary: Insiders Think This Stock Is a Steal

As a prominent mall REIT, Simon Property Group (SPG) share price has been doubly impacted by both the rise of remote work and the surge in online retail, leading to its dividend yield soaring to an impressive 6.5%.

This high yield has prompted a significant change in management’s investment strategy, now favoring the repurchase of SPG shares. With share counts reducing, naturally earnings per share rise through this strategy.

Will higher EPS in turn woo Wall Street making Simon Property a buy now?

Key Points

• Facing rising interest rates and a high dividend yield, Simon management is focusing on stock buybacks and asset sales to manage capital costs.
• What sets Simon apart is its diverse revenue sources, including high-end malls, offices, and hotels, as well as technology to enhance retail experiences.
• Despite a high dividend payout ratio, Simon’s strong balance sheet and capital raising capability position it as a resilient investment.

REIT CEO See Value In Own Stock

What sets REITs apart is their structure, designed to distribute income to investors in a tax-efficient manner. By law, they must distribute at least 90% of their earnings as dividends, leaving limited funds for reinvestment.

As such, Simon and similar REITs face a choice between issuing equity or debt for funding growth, both of which are influenced by the current economic climate. With interest rates climbing, debt issuance has become costlier.

Simon’s dividend yield, hovering around 6.5% and surpassing the average REIT yield by a factor of around a third, indicates a higher equity cost.

Simon’s CEO, David Simon, highlighted this issue in the third-quarter 2023 earnings call, noting the company’s cautious approach toward acquisitions and its focus on stock buybacks and potentially asset sales to generate capital.

The CEO’s emphasis on contrasting every investment opportunity with the potential returns from stock repurchases underscores the company’s current investment strategy.

What Makes Simon Stand Out

Simon Property Group stands out in the mall REIT sector by not only specializing in high-end malls but also boasting a diversified revenue stream from lifestyle centers, offices, and hotels.

Its business model resilience is further enhanced by incorporating technology to improve retail experiences and increase shopper engagement. This digital focus in conjunction with an international property portfolio position Simon well against macroeconomic forces.

Financially, Simon has maintained steady performance, with revenue growth in recent quarters and a solid EBIT range. The company’s recent $1 billion Senior Notes issuance adds to its liquidity, balancing its significant long-term debt in a rising interest rate environment. Analyst projections suggest stable revenues and EPS growth through 2025.

Is Now The Time To Buy?

Simon appears undervalued by over 5% according to analyst consensus. However, the dividend payout ratio eclipsing 100% raises sustainability concerns. In spite of this, Simon’s strong balance sheet and capital raising ability, along with its adaptability in repurposing properties, demonstrate its resilience and potential for growth.

So is it time to buy? Its high dividend yield, diversified revenue streams, international exposure, and proven adaptability make Simon an appetizing choice for investors seeking stability in choppy economic times.

While the stock price may not see significant growth in the near term, the company’s financial health and strategic initiatives suggest a solid investment with potential for continued dividend payouts.