DDR Corp: Beaten-Down Stock with a Huge Yield of 11.1%
A High-Yield Stock You Likely Haven’t Considered
In a bloated stock market, high dividend yields are hard to find.
Consider that, historically, the S&P 500 Index had an average price-to-earnings (P/E) ratio of 15.7 times. Today, the ratio stands at 25.49 times. And since dividend yield moves inversely to share price, elevated valuations have led to suppressed dividend yields. The average S&P 500 company offers a yield of just 1.8% at the moment, which is significantly lower than the index’s historical average of 4.36%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed March 20, 2018.)
However, there is still a group of stocks that can offer much higher yields than the benchmark’s average, even in today’s market: beaten-down stocks.
Of course, a lot of these names are down for a good reason. So it’s important for investors to do the research necessary to distinguish between income opportunities and yield traps.
DDR Corp (NYSE:DDR) looks like an opportunity. Headquartered in Beachwood, Ohio, DDR Corp is a real estate investment trust (REIT) that specializes in retail properties. Its portfolio currently consists of 273 value-oriented shopping centers, totaling 92 million square feet, located across 33 states and Puerto Rico.
Compared to other well-known REITs, DDR Corp might not sound like a familiar name, but the company has actually been in the business since 1965.
The company used to go by the name of Developers Diversified Realty Corporation, but, because ground-up development of shopping centers has only represented a small portion of its business in recent years, it changed its name to DDR Corp in 2011. After the rebranding, DDR also got a new tagline: “Think Retail. Create Value.”
(Source: “DDR Announces New Name, Tagline and Brand Identity,” DDR Corp, September 12, 2011.)
While DDR has a high-quality portfolio of open-air shopping centers located in major metropolitan areas, the company’s retail focus means it hasn’t really been an investor favorite. Over the past 12 months, DDR stock plunged more than 40%. The thing is, though, the situation at DDR Corp may not be as bad as its share price movement seems to suggest.
First of all, the company still provides a well-covered dividend. In the fourth quarter of 2017, DDR Corp generated operating funds from operations (FFO) of $0.28 per share while declaring $0.19 of dividends per share. That translated to a payout ratio of 67.9%. (Source: “DDR Reports Fourth Quarter and Year End 2017 Operating Results,” DDR Corp, February 15, 2018.)
In full-year 2017, the company’s operating FFO totaled $1.18 per share. Given its total dividends of $0.76 per share declared for the year, DDR achieved a payout ratio of 64.4%, also leaving plenty of room for safety.
At the same time, the company is transitioning its portfolio. DDR Corp plans to spin off a portfolio of 50 assets into a separate vehicle named Retail Value Trust. And the remaining company, New DDR, will have a higher-quality, higher-growth portfolio. In particular, more than two-thirds of New DDR’s properties will be anchored by traditional grocers or by merchants with a grocer component, such as Walmart Inc (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST). (Source: “Citi Global Property CEO Conference,” DDR Corp, March 5, 2018.)
These stores tend to do well even during economic downturns, and the grocer component gives retailers a better chance of surviving the rise of the e-commerce industry.
At the end of the day, keep in mind that the downturn in the company’s share price has pushed its yield higher. Trading at $6.85 apiece, DDR Corp offers an annual dividend yield of 11.1%. With a solid business and well-covered distributions, DDR stock could be an opportunity for yield-seeking investors.