Should Investors Consider This High-Yield Stock?
It’s no secret that beaten-down stocks can offer some of the biggest payouts. The problem is, though, when a stock is down and out, chances are the business is also struggling. And without a profitable business, the payout would not be sustainable.
As risk-averse income investors, you don’t want to put your money in a high-yield stock before its dividend gets cut.
Still, for those willing to do the research, it’s possible to find solid dividend-paying companies that are temporarily out of favor. For instance, over the last several months, a beaten-down double-digit yielder has popped up on my radar: DDR Corp (NYSE:DDR).
DDR Corp has been around since 1965 and used to go by the name of Developers Diversified Realty Inc. As time went on, ground-up development played a much smaller role in its business, so the company decided to adopt its NYSE ticker symbol as its name in 2011.
Today, DDR Corp is a self-administered and self-managed real estate investment trust that focuses on open-air shopping centers.
DDR stock deserves income investors’ attention for a very obvious reason: yield. Right now, a company with a five percent payout would proudly brand itself as a high-yield stock. DDR Corp, on the other hand, pays quarterly dividends of $0.38 per share, giving the stock a jaw-dropping annual yield of 11.2%.
Of course, as I mentioned earlier, DDR Corp is one of the beaten-down stocks. Over the past 12 months, share prices of this real estate company tumbled 18%. Over the last five years, DDR stock is down nearly 50%.
Still, despite its disappointing share price performance, DDR Corp deserves income investors’ attention. The reason is simple: the company has been making a turnaround.
DDR Corp Is Making a Strategic Transformation
You see, one of the reasons behind DDR stock’s lack of investor appeal was the downturn in the retail industry. The company is basically a giant landlord that owns and manages shopping center real estate.
Now, we know that over the past decade or so, consumers have embraced online shopping. And as the e-commerce industry takes main stage, investors have been concerned about the future of brick-and-mortar stores. In fact, quite a few physical retailers have reported slowing sales figures in recent years.
Because DDR Corp is a shopping center REIT, its tenant base consists of quite a few retailers. If these retailers are struggling, they might have problems paying their rent. Therefore, the concern about the slowing retail industry has made investors cautious about putting their money in DDR stock.
The thing is, though, the company is not standing still. In fact, DDR Corp has just spun off a portfolio of 48 assets into a separate company named Retail Value Inc (NYSE:RVI). The spin-off was completed last month. (Source: “DDR Announces Completion of Spin-Off of Retail Value Inc,” DDR Corp, July 2, 2018.)
To put it simply, the transaction allows the remaining company, let’s call it “New DDR,” to have a higher-quality, higher-growth portfolio.
For instance, in “Old DDR’s” portfolio, the annual base rent per square feet was $16.49. After the spin-off, New DDR’s annual base rent (pro-rata) would increase almost five percent to $17.29. (Source: “Strategic Transformation NAREIT Update,” DDR Corp, last accessed August 10, 2018.)
New DDR’s real estate assets are also located in higher-income locations. The average household income within a three-mile radius of the company’s shopping centers stood at $84,294 before the spin-off. After the spin-off, the amount increased to $98,675.
Furthermore, the transaction allowed the company to improve its occupancy rate. After the spin-off, New DDR’s portfolio has a consolidated leased rate of 93.7%, up from Old DDR’s 92.9%.
“I am extremely excited by the completion of the spin-off of RVI, which should allow our shareholders to benefit from value realization through operations and dispositions at RVI and redevelopment, same-store [net operating income] growth, and opportunistic investing at New DDR,” said DDR’s president and chief executive officer David R. Lukes last month. (Source: op. cit.)
DDR Stock Is Maintaining a Solid Divided
The best part is, while we are yet to see material improvement in DDR’s financials from this strategic transformation, the company already makes enough money to support its generous dividend policy.
In the second quarter of 2018, DDR Corp generated operating funds from operations (OFFO) of $90.5 million, or $0.49 per diluted share. Since the company declared a quarterly dividend of $0.38 per share, it had a payout ratio of 77.6%. (Source: “DDR Reports Second Quarter 2018 Operating Results,” DDR Corp, July 25, 2018.)
In the first half of 2018, DDR Corp’s OFFO came in at $1.02 per share. Given the company’s total dividends of $0.76 per share declared during this period, its payout ratio came out to 74.5%, also leaving a sizable margin of safety.
As it stands, DDR stock’s double-digit yield could be an opportunity.