Washington Prime Group Inc: This $3.95 Stock Yields 25.3%
Looking for Ultra-High Yield? Read This
When a company with a four-percent payout can be labeled as a high-yield stock, anything above 10% appears too good to be true. But with an inverse relationship between a company’s dividend yield and its share price, there are plenty of beaten-down tickers with jaw-dropping payouts.
Case in point: Washington Prime Group Inc (NYSE:WPG), a real estate investment trust (REIT) headquartered in Columbus, Ohio. WPG stock tumbled from $17.14 to $3.95 over the past five years, marking a painful drop of about 77%.
Meanwhile, the company has maintained its cash dividend at $0.25 per share since the stock went public in 2014. At its current share price, Washington Prime Group stock’s quarterly dividend rate comes out to an annual yield of 25.3%. (Source: “WPG Dividend History,” Washington Prime Group Inc, last accessed September 17, 2019.)
Now, you are likely wondering how the company can afford to have such a generous dividend policy.
Well, like most REITs, Washington Prime Group is basically a landlord. The company has a portfolio of enclosed and open-air shopping centers totaling 56 million square feet. By collecting rent from the tenants of these properties, the company can generate a predictable stream of cash flow and fund its dividends. (Source: “BAML Global Real Estate Conference September 2019,” Washington Prime Group Inc, last accessed September 19, 2019.)
Like most REITs, one of the key performance metrics at Washington Prime Group is funds from operations (FFO). What risk-averse income investors want to see is a REIT that can generate FFO in excess of its dividend payout.
And that’s actually the case with Washington Prime Group. In the second quarter of 2019, the company generated FFO of $0.27 per share, which was more than enough to cover its quarterly cash dividend of $0.25 per share. (Source: “Washington Prime Group Announces Second Quarter 2019 Results and Reaffirms Earnings Guidance and Dividend Policy for 2019,” Washington Prime Group Inc, July 24, 2019.)
Look a little further back and you’ll see that the REIT earned $0.59 per share in FFO in the first six months of 2019. Its dividend payments, on the other hand, totaled $0.50 per share during this period. So again, WPG stock’s FFO provided more than enough coverage for its dividend payout.
Of course, like most down-and-out tickers, Washington Prime is not perfect. In particular, the company’s combined tier-one and open-air occupancy decreased by 120 basis points to 92.5% in the second quarter. This was due to the bankruptcies of Payless ShoeSource, Gymboree, and Charlotte Russe.
What’s Next for Washington Prime Group Inc?
Given the headwinds facing the retail industry, investors of Washington Prime Group stock would want to know where the company’s dividends are going.
In the most recent earnings conference call, WPG’s Chief Executive officer (CEO) Lou Conforti said, “We’re reaffirming both 2019 FFO and dividend guidance of $1.20 and $1 per diluted share respectively; we’re maintaining 2020 [comparable net operating income] growth forecast of at least 2%.” (Source: “Washington Prime Group’s (WPG) CEO Lou Conforti on Q2 2019 Results – Earnings Call Transcript,” Seeking Alpha, July 25, 2019.)
Washington Prime Group has already declared and paid three quarterly dividends of $0.25 this year. So, based on management’s guidance, the next dividend will likely also be $0.25.
Last but certainly not least, Conforti also commented on something called “lifestyle tenancy” in the earnings conference call. Washington Prime Group Inc’s lifestyle tenancy includes food, beverage, entertainment, fitness, home furnishings, and professional services.
“We’ve leased 2.1 million square feet year-to-date, which is a 14% year-over-year increase with lifestyle tenancy accounting for 55%,” said Conforti. (Source: Ibid.)
These businesses tend to be Internet-proof. Therefore, even if the retail industry continues to face headwinds caused by e-commerce, WPG’s lifestyle tenants will likely be able to keep paying rent.
At the end of the day, note that, while WPG stock trades for under $4.00 apiece, the stock is actually up more than 20% since the beginning of September. This was likely due to a squeeze as short-sellers rushed to cover their positions.
All things considered, I wouldn’t call Washington Prime Group stock a slam dunk. But as it stands, this stock deserves a spot on income investors’ watch lists.