Updated on November 22nd, 2021 by Bob Ciura
Stocks with very long dividend streaks are highly appealing because they generate stable earnings and pay reliable dividends during recessions.
Very few companies can offer this resilience during economic downturns, so investors must be careful when selecting which dividend stocks to own for the long-term.
One group of stocks that has stood the test of time is the Dividend Kings, a set of just 33 stocks in the S&P 500 with at least a half century of consecutive dividend increases.
You can see all 33 Dividend Kings here.
You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
Federal Realty Investment Trust (FRT) is a Dividend King that has 54 consecutive years of dividend increases.
This streak would be impressive for any stock, but for a REIT (a sector which is notoriously susceptible to recessions) this streak is extraordinary.
In fact, Federal Realty is the only REIT on the Dividend Kings list.
Below, we’ll take a look at Federal Realty’s business and its prospects for continuing its dividend streak.
Federal Realty was founded in 1962 and since that time, it has grown into a powerhouse retail-focused REIT that operates in high income, densely populated coastal markets in the US.
Related: You can see Sure Dividend’s REIT list here.
The trust sees these markets as having favorable demographics for the long-term in terms of population and income growth.
Source: Investor presentation
This strategy of owning premium properties in premium markets has served the trust well, and it has grown steadily over the years.
Federal Realty also has a highly diversified property portfolio.
No single tenant represents more than 3% of Federal Realty’s annualized base rent. And, its top 25 tenants collectively represent 27% of ABR.
Federal Realty has over 3,100 tenants in over 100 properties, which represents a high level of diversification in terms of both tenants and geographic markets.
Federal Realty’s growth hasn’t always been huge in any given year, but over time, funds-from-operations continue to move up.
Indeed, 2020 was the first year in more than a decade where the trust didn’t produce higher year-over-year FFO per share.
For a REIT, that is a staggeringly good track record. Of course, the decline in FFO last year was due to circumstances out of the company’s control, namely the coronavirus pandemic.
However, Federal Realty has also been a huge beneficiary of the economic recovery over the past year.
Federal Realty reported Q3 earnings on 11/04/21. FFO per share came in at $1.51, up 35% from $1.12 in the year–ago quarter. Total revenue came in at $247.3M, up 19.1% year-over-year.
The company acquired 8 assets totaling 1.9 million square feet on 135 acres of land at gross value of $441 million. During the quarter, Federal Realty signed 119 leases for 430,234 square feet of comparable space.
The company’s portfolio was 90.2% occupied during the quarter, up by 60 basis points quarter–over–quarter. Meanwhile, as of October 29th, 2021, Federal Realty collected 96% of total Q3 billed recurring rents.
Moreover, the company raised its 2022 FFO per diluted share guidance to $5.65–$5.85, from previous guidance of $5.30–$5.50.
Competitive Advantages & Recession Performance
Federal Realty’s competitive advantage is in its development pipeline, as well as its focus and relative dominance of very attractive markets.
The trust has proven over time it can produce industry-leading average base rents and that is because it has proven extremely adept at selecting and developing the best properties in the US.
Another competitive advantage is the company’s strong balance sheet, which stands out among REITs. FRT has a solid credit rating of A- and sufficient liquidity with $1.45 billion of cash and undrawn credit facility as of the end of the third quarter.
These competitive advantages have helped it not only grow FFO over time, but continue to raise its dividend during some very harsh recessions.
Below, we have Federal Realty’s FFO-per-share before, during, and after the Great Recession:
- 2007 FFO-per-share: $3.62
- 2008 FFO-per-share: $3.85 (6.4% increase)
- 2009 FFO-per-share: $3.51 (8.8% decrease)
- 2010 FFO-per-share: $3.88 (10.5% increase)
While Federal Realty wasn’t able to grow every year during the recession, it was able to grow over time, albeit slightly. However, this was enough to keep its very impressive dividend streak alive.
Based on FRT’s forward guidance, the company expects to generate FFO-per-share of $5.75 in 2022. This means the forward dividend payout ratio is ~74%, which indicates a sustainable dividend for a REIT.
The fact that FRT managed to last through the 2020 economic downturn caused by the pandemic and still raise its dividend, is a sign of the underlying strength of its business model.
Valuation & Expected Returns
At the current share price of $130, and using $5.21 in expected FFO-per-share for 2021, the stock is trading for 25 times earnings.
Meanwhile, our fair value P/FFO estimate for Federal Realty is 15, which means we view the stock as significantly overvalued today.
If the P/FFO ratio declines to 15 over the next five years, annual returns would be reduced by approximately 9.7% per year. Therefore, valuation is expected to be a major drag on future returns.
Partially offsetting this will be expected FFO-per-share growth of 5% per year, plus the current dividend yield of 3.3%. However, this is not enough to fully offset a declining P/FFO multiple.
Fortunately, FRT stock still has wide appeal as a dividend growth investment.
Source: Investor Presentation
The company has an unparalleled track record among REITs when it comes to dividend growth.
But in terms of total returns, we view the current valuation of FRT stock as problematic for investors buying at the current levels.
Overall, we expect total returns of -1.4% per year over the next five years. Put differently, we estimate current buyers will lose money over the next five years.
Federal Realty has had its share of challenges over the years, due to multiple recessions and the coronavirus pandemic.
Despite this, Federal Realty maintains an unmatched 54-year history of annual dividend increases.
FFO-per-share growth should be reasonably strong as the U.S. economy continues to recover from the pandemic. And, the dividend payout appears secure.
However, the overvaluation of the stock means investors are paying too high a premium for the shares right now, in our view.
With negative expected returns over the next five years, we rate Federal Realty stock as a sell.