A good way to summarize the journey to financial independence is the Chinese proverb: "A journey of a thousand miles begins with a single step." But the hardest part about investing in an environment with information at your fingertips and commission-free stock purchases is simply beginning.
If you have $1,000 (or even less) that you can afford to invest, you can begin taking the steps necessary to securing your financial future. Simon Property Group (SPG 0.42%), a real estate investment trust (REIT) that specializes in malls and outlet centers, is one high-quality stock to consider purchasing. Let's look at why.
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Consumers value experiences
Recent surveys have shown that 75% of millennials value experiences more than material goods. This is good news for Simon because its 200-plus properties throughout North America, Asia, and Europe offer shopping, dining, and other entertainment experiences, which explains why the company's fundamentals have bounced back so quickly after a challenging 2020.
Simon Property Group's funds from operations (FFO) per share plunged 24.3% from the pre-pandemic year of 2019 to $9.11 in 2020. While cost reductions were able to partly offset the effects of COVID-19, reduced revenue from higher uncollectable rents and lower sales-based rent led to the drop-off in FFO per share in 2020.
However, increasing vaccination rates and more available COVID treatments bode well for Simon's future financial results. Because of strong operating results through the first three quarters of 2021, the company raised its guidance on FFO per share from the previous midpoint of $10.75 to $11.60. The projected midpoint FFO per share for 2021 is just 3.7% below the $12.04 that was reported in 2019, which suggests the business is turning the corner past the brunt of COVID.
At the heart of Simon's robust recovery is the fact that an average of 52% of U.S. adults surveyed last month felt comfortable with activities like dining out, shopping, and traveling. This was more than double the rate in December 2020 and only a few percentage points below the high of 56% set in July 2021 as the delta variant was spreading throughout the world.
As the revenue of Simon's tenants goes higher in the quarters ahead, so too will its revenue and FFO per share. That's because in 2020, the REIT worked to help keep its tenants afloat. It agreed to accept lower base-rent payments, but a higher percentage of sales. Now, with tenants' sales on the rise as more consumers learn to live with pandemic conditions, Simon will benefit from higher rent and FFO per share.
The dividend is gradually recovering to pre-COVID levels
Due to the challenges that Simon faced in 2020, the company opted to cut its quarterly dividend per share by 38.1% from $2.10 to $1.30 in June of that year. Given the uncertainty at the time, this was done to preserve ample liquidity and keep the business at low risk of insolvency.
As a result of the economic rebound over the last 18 months, Simon raised its quarterly dividend three times in 2021. The current quarterly dividend of $1.65 per share is just below the halfway mark of a full recovery to pre-COVID levels. FFO per share is on track to bounce back to just below pre-COVID levels in 2021 and likely beyond pre-COVID levels this year. That's why I believe the quarterly dividend will be around $2 by the end of this year.
Even if Simon were to pay $8 in dividends per share for the whole year of 2022, this would equate to a dividend payout ratio in the 65% range (assuming just over $12 in FFO per share). This would give the company room to gradually grow the payout while also investing in property developments. Modest dividend growth on top of a market-beating 4.5% yield is an appealing combination.
A reasonably priced stock
Simon's stock rocketed 87% higher in 2021 to close at $160 a share, which would lead an investor to believe it has swung from undervalued to overvalued. But because the stock plummeted 43% in 2020 to $85 a share, this barely brought it above where it closed in 2019.
And despite the progress in FFO per share at getting back to pre-COVID levels, the stock's $143 share price as of Tuesday morning is just below the $149 closing price in 2019. Trading at a ratio of price to FFO per share of just 12.3, the stock is still attractively valued for income investors.
