CBL & Associates Properties, Inc.: This 18.1% Yield Looks Interesting
Beaten-Down Stock Offers a Big Payout
“Be fearful when others are greedy and greedy when others are fearful.”
That is one of the most famous quotes by legendary investor Warren Buffett. And while many investors want to follow his advice, it is easier said than done. After all, when nearly everyone is bearish about an industry, would you bet your hard-earned money that it would make a comeback?
And that’s basically the situation at CBL & Associates Properties, Inc. (NYSE:CBL) right now. Over the past 12 months, CBL stock plunged more than 40%.
There is a very simple reason behind the lack of investor interest in CBL stock: the downturn in the retail industry.
As the name suggests, CBL & Associates Properties is in the real estate business. Structured as a real estate investment trust (REIT), the company’s portfolio consists of 63 shopping malls, five outlet centers, 23 associated centers, nine community centers, and five office buildings. CBL also manages 14 properties for third parties. (Source: “CBL Properties Investor Presentation,” CBL & Associates Properties, Inc., last accessed May 18, 2018.)
Because of the booming e-commerce industry, investors have been concerned about the future of brick-and-mortar retailers. With a significant portion of its portfolio made up of retail properties, CBL was far from being a market favorite.
However, we shouldn’t forget that by choosing to be regulated as a REIT, CBL & Associates Properties is required by law to distribute most of its profits to shareholders in the form of dividends.
And since a company’s dividend yield moves inversely to its share price, the drop in CBL stock has made it one of the highest yielding names trading on the New York Stock Exchange.
Paying quarterly dividends of $0.20 per share, CBL & Associates Properties offers investors an annual yield of 18.1%.
Of course, when the average S&P 500 company pays less than two percent, a double-digit payout could simply be a sign of trouble. However, if you take a look at CBL’s earnings reports, you’d see that it actually has more than enough resources to back its generous dividend policy.
In 2017, CBL & Associates Properties generated adjusted funds from operations of $2.08 per share, while its dividends totaled $1.02731 per share. That translated to a payout ratio of 49.4%, leaving a wide margin of safety. (Source: “CBL & Associates Properties Reports Results for Fourth Quarter and Full-Year 2017,” CBL & Associates Properties, Inc., February 8, 2018.)
In the first quarter of 2018, the company generated adjusted funds from operations of $0.42 per share while paying out $0.20885 of dividends per share. Therefore, it had a payout ratio of 49.7%. (Source: “CBL Properties Reports Results for First Quarter 2018,” CBL & Associates Properties, Inc., April 26, 2018.)
In other words, even though the company offers a jaw-dropping dividend yield, it was actually paying out less than half of the cash generated from its operations. For investors concerned about this ultra-high yielder’s dividend safety, the low payout ratio should be reassuring.
Will the Company Make a Turnaround?
The best part is, CBL & Associates Properties is not standing still. The company has been transforming its portfolio to better position itself in the challenging retail environment.
Consider this: in 2013, CBL & Associates Properties’ portfolio had rolling 12 month sales per square foot of $356.00. In 2017, the number had grown to $372.00. Furthermore, from 2013 to 2017, the company’s stabilized mall average base rent per square foot had increased 7.3%.
Since 2013, CBL has disposed of 20 lower productivity malls. Today, 91% of the company’s mall net operating income comes from market dominant or “only game in town” malls in its portfolio. The average distance between the company’s malls and its nearest competition is 22 miles.
At the end of the day, keep in mind that like most double-digit yielders, CBL stock is not a slam dunk. Despite the efforts in improving its portfolio, the company still has a sizable exposure to the retail industry. And as consumers continue to shift from physical stores to online vendors, the industry would face headwinds going forward.
Still, for those who understand the underlying risks, CBL & Associates Properties’ 18.1% yield could be worth a look.