- Tanger, in my view, is a cash cow, and that’s one of the primary reasons I have been so bullish with this pick.
- We maintain a Strong Buy on Tanger shares.
- “Buy not on optimism, but on arithmetic.” Benjamin Graham.
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It appears that there's life left after all when it comes to Tanger Outlets (SKT). Despite being one of the most beaten-down REITs in our coverage spectrum, it’s not dead yet.
Nor do we expect it to be, and not because shares were up around 14% in the month of October. We’ll be the first to admit that – with the threat of continued store closures – there will be continued volatility in the months and quarters ahead.
Source: Yahoo Finance
With that said, Tanger’s main problem is that it’s considered to be a mall REIT. Otherwise, I’m confident it would be trading more like Kimco (KIM) or Brixmor (BRX) – which means it would be up around 50% year-to-date.
Source: Yahoo Finance
For proof, consider how Tanger is the ONLY mall REIT that increased its dividend during the last recession. This means it’s the only “dividend aristocrat” (defined as having over 25 years of divided growth) in the mall sector.
A stock that reliable has no business trading at the valuation it is.
Source: Q3-19 Investor Presentation
More About Tanger’s Dividend
Based on all available data – including Q3-19 earnings results – it appears that Tanger is well-positioned to continue growing its dividend, regardless of the cyclical nature of the retail landscape.
It’s true that many mall REITs are struggling to maintain their dividend. CBL Properties (CBL), Washington Prime (WPG), Macerich (MAC), and PREIT (PEI) are all looking iffy or downright dangerous right now.
But Tanger’s dividend enjoys a wide margin of safety as its CEO, Steve Tanger, explained on the Q3 earnings call:
“We have a 26-year historic commitment to paying a quarterly cash dividend. Our dividend remains well covered, as we expect to generate nearly $95 million of free cash flow over and above our dividend during 2019 and have nearly $600 million in unused line of credit capacity.”
Tanger, in my view, is a cash cow. That’s one of the primary reasons I’ve been so bullish with this pick.
There’s no doubt that the current business cycle has been challenging. But the business model is one of the most solid in the REIT sector. And management deserves credit for its highly disciplined expertise.
Put another way, I consider discipline to be Tanger’s primary competitive moat. While that can pertain to cost of capital, scale, and other competitive advantages, they’re all connected at the hip by a highly-disciplined CEO who recognizes that growing the company’s dividend is the key to winning.
Now let’s dig deeper into Q3-19 earnings.
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