Today we’ll take a closer look at Tanger Factory Outlet Centers, Inc. (NYSE:SKT) from a dividend investor’s perspective. Owning a strong dividend company and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With Tanger Factory Outlet Centers yielding 7.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. It also bought back stock during the year, equivalent to approximately 1.1% of the company’s market capitalisation at the time. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 54% of Tanger Factory Outlet Centers’s profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 51%, which is not bad per se, but does start to limit the amount of cash Tanger Factory Outlet Centers has available to meet other needs.
It is worth considering that Tanger Factory Outlet Centers is a Real Estate Investment Trust (REIT). REITs have different rules governing their payments, and are often required to pay out a high portion of their earnings to investors.
Is Tanger Factory Outlet Centers’s Balance Sheet Risky?As Tanger Factory Outlet Centers has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures a company’s total debt load relative to its earnings (lower = less debt), while net interest cover measures the company’s ability to pay the interest on its debt (higher = greater ability to pay interest costs). Tanger Factory Outlet Centers has net debt of 6.10 times its earnings before interest, tax, depreciation and amortisation (EBITDA) which implies meaningful risk if interest rates rise of earnings decline.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Interest cover of less than 5x its interest expense is starting to become a concern for Tanger Factory Outlet Centers, and be aware that lenders may place additional restrictions on the company as well. Low interest cover and high debt can create problems right when the investor least needs them. We’re generally reluctant to rely on the dividend of companies with these traits.
We update our data on Tanger Factory Outlet Centers every 24 hours, so you can always get our latest analysis of its financial health, here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Tanger Factory Outlet Centers’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.77 in 2009, compared to US$1.42 last year. Dividends per share have grown at approximately 6.4% per year over this time.
Dividend Growth Potential
While dividend payments have been relatively stable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Over the past five years, it looks as though Tanger Factory Outlet Centers’s EPS have declined at around -17% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Tanger Factory Outlet Centers’s is paying out more than half its income as dividends, but at least the dividend is covered both by reported earnings and cashflow. It’s not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Tanger Factory Outlet Centers out there.
See if management have put their money where their mouth is, by checking insider shareholdings in Tanger Factory Outlet Centers stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.