Can This Mall Owner Maintain Its 7.7% Yield?

When mall owner Simon Property Group (NYSE: SPG) reports third quarter results in a few weeks, it will be perhaps the most important earnings report in its history. Brick-and-mortar retail has gotten crushed in 2020.

While malls were already facing stiff competition from online competitors, the pandemic temporarily shut retailers’ doors during the spring and many are still experiencing drastically reduced traffic.

So shareholders will be watching Simon’s earnings report closely to see whether its generous 7.7% dividend yield is sustainable.

Now, keep in mind, the company already cut its quarterly dividend in 2020 from $2.10 per share to $1.30. The reduction tarnished a solid annual dividend-raising track record going back to 2010.

But that all feels like ancient history. Can Simon Property Group maintain the $1.30 per share payout each quarter?

Not surprisingly, funds from operations (FFO) – a measure of cash flow used by real estate investment trusts (REITs) like Simon Property Group – is expected to be down sharply this year, hitting its lowest level since 2012.

Just prior to the pandemic, Simon Property Group’s FFO dipped. SafetyNet Pro is not a fan of declining cash flow for any reason, so Simon Property Group’s rating will be hit hard by the lower numbers in 2019 and 2020.

The good news is that because the company slashed its dividend earlier this year, it is forecast to pay only $1.9 billion in dividends. So even if FFO comes in lower than the expected $2.98 billion, the company should be able to afford the dividend for the rest of the year.

But what happens next year?

With Simon Property Group’s declining FFO and a recent dividend cut, the quantitative model that runs SafetyNet Pro suggests another reduction in dividends in the next 12 months.

Considering the state of brick-and-mortar retail, particularly in our big malls, I’d have to agree.

We’ll see whether the company reports anything to convince us otherwise when it releases its third quarter results on November 2.

Dividend Safety Rating: F

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Good investing,

Marc