Traditional retailers aren't faring too well in the stock market this year. While the S&P 500 has gained around 17% year to date, shares of some of the biggest retailers are lagging badly.
Many retailers have been struggling with the back-to-back problems of excess inventory and slumping consumer demand. Target, for example, is barely growing at all as demand for discretionary products softens.
One retail stock that has soundly beaten the market so far this year is Tanger Outlets(NYSE: SKT). The real estate investment trust (REIT), which operates dozens of outlet centers in North America, has been successfully clawing its way back over the past couple of years as pandemic restrictions eased and shoppers returned to stores. While Tanger was forced to suspend its dividend for a stretch during the pandemic, the company restarted its dividend in early 2021 and has been steadily growing it.
Tanger stock is up about 29% since the start of the year, but it's not too late to buy this fantastic dividend stock.
A recovering business
No company is fully immune from deteriorating economic conditions, and that's doubly true in the retail industry. However, Tanger's core pitch to consumers should resonate even more strongly during times when household budgets are being stretched. Tanger's outlets offer brand-name products at discounted prices, allowing consumers to "trade down" without really trading down at all.
The company's outlets are appealing to retailers, as well, providing a channel to sell excess merchandise without needing to resort to big markdowns at normal stores. And because occupancy costs can be lower for retailers in Tanger's outlets, retailers can generate solid margins even as they charge lower prices.
Tanger's tenant base is highly diversified. The largest tenant accounts for just 6% of the REIT's annualized base rent, and the top 10 tenants account for about 35%. The remaining 65% is split among Tanger's myriad smaller tenants. The company has also been looking beyond retailers to expand the appeal of its outlet centers, including food and entertainment venues.
The REIT's bottom line has been steadily recovering over the past few years as occupancy rates have bounced back from pandemic-era lows. Occupancy sat at 96.5% in the first quarter of 2023, a bit below historical levels but more than 2 percentage points higher than the same period last year.
Rising occupancy and improving rent spreads have helped push up adjusted funds from operations (FFO). This metric is expected to reach as high as $1.90 per share in 2023, which puts the price-to-FFO ratio at about 12. Adjusted FFO is still below pre-pandemic levels and well below peak levels reached in 2016, so there's plenty of room for the bottom line to expand further.
SKT FFO Per Share (TTM) data by YCharts.
A solid dividend
Tanger's dividend is smaller than it was before the pandemic, but the stock still sports an attractive dividend yield. Based on the most recent quarterly dividend of $0.245 per share, the company's stock has a dividend yield of about 4.2%.
The REIT has grown its dividend by 38% since dividend payments were reinstated in early 2021, and the latest one was about 11% higher than the previous payment. The current dividend consumes about half of Tanger's adjusted FFO, and the company should be able to push the dividend higher as FFO expands.
Shares of Tanger have come roaring back this year, but the stock would still need to nearly double to reach its all-time high. While it may take a while for the stock to carve out a new all-time high, given the current economic climate, the company is making good progress on its recovery. The stock looks inexpensive, and a 4%-plus dividend yield is the icing on the cake.
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Timothy Green has positions in Tanger Factory Outlet Centers. The Motley Fool has positions in and recommends Best Buy, Home Depot, Target, and Walmart. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.
