Here's Why We're Wary Of Buying Tanger Factory Outlet Centers, Inc.'s (NYSE:SKT) For Its Upcoming Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Tanger Factory Outlet Centers, Inc. (NYSE:SKT) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of July will not receive this dividend, which will be paid on the 15th of August.
Tanger Factory Outlet Centers's next dividend payment will be US$0.35 per share. Last year, in total, the company distributed US$1.42 to shareholders. Last year's total dividend payments show that Tanger Factory Outlet Centers has a trailing yield of 8.5% on the current share price of $16.67. If you buy this business for its dividend, you should have an idea of whether Tanger Factory Outlet Centers's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Tanger Factory Outlet Centers
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Tanger Factory Outlet Centers is paying out an acceptable 55% of its profit, a common payout level among most companies. While Tanger Factory Outlet Centers seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don't think this is great, we also don't think it is unusual. A useful secondary check can be to evaluate whether Tanger Factory Outlet Centers generated enough free cash flow to afford its dividend. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Tanger Factory Outlet Centers's 5.2% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Tanger Factory Outlet Centers has lifted its dividend by approximately 6.5% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
Final Takeaway
Is Tanger Factory Outlet Centers worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least Tanger Factory Outlet Centers's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Tanger Factory Outlet Centers is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Curious what other investors think of Tanger Factory Outlet Centers? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.