STAG Industrial (STAG) | Monthly Dividend Safety Analysis

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Monthly Dividend Stock In Focus: STAG Industrial


Updated on September 13th, 2022 by Aristofanis Papadatos

For investors seeking yield, the real estate industry is a great place to look. Intuitively, this is not surprising. Real estate owners collect predictable income from their tenants. Thus, the real estate business is qualitatively geared for business owners that want to collect periodic income.

One of the best ways for investors to gain exposure to the real estate industry is through Real estate Investment Trusts – or REITs, for short.

STAG Industrial (STAG) is a commercial REIT that focuses on leasing single-tenant industrial properties throughout the US. The stock’s current dividend yield of 4.5% is triple the 1.5% average yield in the S&P 500.

Moreover, STAG Industrial pays monthly dividends (rather than quarterly). This is highly beneficial for retirees and other investors who rely on their dividend income to cover life’s expenses. There are currently 49 monthly dividend stocks.

You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:

 

Thanks to its high yield and its monthly dividend payments, STAG Industrial has the potential to be a great investment for income investors, particularly since the company has a long runway of growth ahead.

Business Overview

STAG Industrial is a Real Estate Investment Trust, or REIT. It is an owner and operator of industrial real estate. It is focused on single-tenant industrial properties and has 559 buildings across 40 states in the United States. The focus of this REIT on single-tenant properties might create higher risk compared to multi-tenant properties, as the former are either fully occupied or completely vacant.

However, STAG Industrial executes a deep quantitative and qualitative analysis on its tenants. As a result, it has incurred credit losses that have been less than 0.1% of its revenues since its IPO. As per the latest data, 54% of the tenants are publicly rated and 59% of the tenants generate over $1 billion in revenue.

Source: Investor Presentation

The company typically does business with established tenants to reduce risk. Moreover, STAG Industrial has limited exposure to any specific tenant. Amazon is the largest tenant, generating 3.1% of annual rent revenue while the next largest tenant generates only 1.0% of annual rent revenue.

STAG has an added advantage thanks to its exposure to e-commerce properties, which gives it access to a key growth segment in real estate.

Source: Investor Presentation

The penetration rate of e-commerce is expected to grow from 14% in 2021 to 30% by 2030. This secular shift in consumer behavior will provide a strong tailwind to the business of STAG for the next several years.

STAG is currently facing a headwind due to the pandemic. However, the effect of the pandemic on the REIT has been limited so far thanks to the high credit profile of its tenants. The REIT collected approximately 99% of its base rental billings in 2021 and has collected 100% of its base rental billings in the first half of 2022.

Some REITs view single-tenant properties as risky because these properties are viewed as a binary proposition; they are either fully leased or empty. However, focusing on single-tenant properties creates mispriced assets, which STAG can then add to its portfolio at attractive valuations. This is central to STAG’s strategy and is a key differentiator among competitors.

STAG’s addressable market is in excess of $1 trillion, a significant portion of which is made up of single tenant properties. The sector is highly fragmented, meaning that no particular entity would have a significant scale advantage. This is why STAG believes it can purchase mispriced assets.

STAG finds this to be an attractive mix of assets and combined with relatively low capex and high retention rates, it has created a strong portfolio of industrial real estate.

STAG’s tenant profile reflects the vast diversification it has built into its portfolio. This diversification mitigates the risk of owning single tenant properties to a great extent. STAG has done a nice job of taking a relatively risky sector of real estate – single tenant properties – and building a portfolio in such a way that it greatly reduces that risk.

Growth Prospects

STAG Industrial’s growth since its IPO in 2011 has been impressive from both a fundamental and an investor return perspective. Fortunately, this real estate trust still has ample room for future growth.

In late July, STAG reported (7/27/22) financial results for the second quarter of fiscal 2022. Core funds from operations (FFO) grew 18% over the prior year’s quarter thanks to the sustained strength of the REIT’s tenants and material hikes in rent rates. Core FFO per share grew at a slower rate (8%), from $0.48 to $0.52, due to the issuance of new units. Net operating income grew 19% over the prior year’s quarter while the occupancy rate improved to 98.1%.

During the second quarter, STAG Industrial acquired 9 buildings for $165.4 million, at a capitalization rate of 5.2%. We expect the REIT to continue to recover from the downturn caused by the pandemic in the upcoming quarters.

The trust continues to invest heavily in new properties as it expands its portfolio, and much of that financing is done with new common stock. We expect the trust to continue to issue new shares for the foreseeable future in order to expand its portfolio.

STAG has grown its FFO per share at a 5.7% average annual rate over the last decade and at a 7.6% average annual rate over the last five years. We believe that STAG is likely to continue to grow at a similar mid-single-digit rate. Indeed, we forecast 5% annual FFO-per-share growth over the next five years. The trust still has a very small market share in its target market of real estate assets, leaving plenty of room for expansion.

STAG has a highly-diversified tenant base with nearly the entire portfolio comprised of tenants with at least $100 million in annual revenue. Furthermore, the trust has very little exposure to any particular industry or tenant. Diversification will help shelter the trust from the impacts of the next economic downturn.

The market dynamics of the sector are favorable as well and have improved meaningfully in recent years. With continued adoption of digital selling channels from retailers, we expect STAG to continue to enhance its asset portfolio and grow at a healthy pace.

Dividend Analysis

STAG is a high-dividend REIT. Its dividend is obviously very important, as investors generally own REITs for their payouts. STAG’s payout has grown every year since its IPO and stands today at $1.46 per share. However, dividend growth since 2015 has been minimal, having averaged only 1.0% per year during this period.

We do not see material growth in the dividend moving forward, but STAG’s payout ratio, which currently stands at 66% of FFO-per-share, provides a meaningful margin of safety for the dividend. We expect STAG to continue raising its dividend at a very slow pace for the foreseeable future in order to avoid ending up in a tight spot like it did in the earlier half of the trailing decade.

The current payout ratio is down significantly from previous levels near 100% as STAG has made a concerted effort to reduce the vulnerability of its dividend. However, that effort is still underway and hence we see meaningful payout growth as unlikely in the near-term.

The current payout ratio, combined with our expectations for mid-single-digit FFO-per-share growth in the coming years, should gradually improve the safety of STAG’s dividend. The trust has also made divestitures when pricing is favorable, an option it could use to temporarily cover dividend shortfalls. In short, we view the 4.5% dividend yield of the REIT as safe for the foreseeable future.

Final Thoughts

STAG Industrial has two characteristics that will immediately appeal to income investors: a 4.5% dividend yield and regular monthly dividend payments. In addition, the REIT has promising growth prospects and is reasonably valued right now. As a result, it can offer a total average annual return of about 10% over the next five years.

We like the trust’s strategy for long-term growth in a sector of real estate that is sometimes ignored by investors due to its perceived riskiness. Thus, STAG Industrial makes a good potential addition to a high-yield portfolio thanks to its high dividend yield, its monthly dividend payments, and leadership in the single-tenant industrial real estate market. Overall, STAG Industrial seems an attractive candidate for income-oriented investors, especially in the highly inflationary investing environment prevailing right now..

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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