Should You Keep Avoiding This 6.6% Dividend?
Back In August I showed you 2 Reasons To Avoid Simon Property Group to protect your retirement portfolio…
Today, I answer the question – Should You Keep Avoiding Simon Property Group After Earnings? You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should avoid it back in August.
2 Reasons To Avoid Simon Property Group
- It’s Got A Lot Of Debt
As a percentage of its balance sheet, Simon Property Group (SPG) is enormously indebted.
As of the most recent quarter its balance sheet is made up of 93.5% of total liabilities. And its debt to equity ratio is 13.12.
And as of this writing its current market cap is $19.2 billion. While it has $28.1 billion in debt and leases it must pay.
But as you’ll see below its not getting paid much by its tenants and this leads to its own problems with debt.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Simon has the opposite problem – in too much debt on an individual basis. And this makes it enormously risky.
I usually invest in companies that have debt to equity ratios at 1 or below. Simon’s is 13.12X this.
And its debt is 46.4% higher than its entire market cap.
But there’s another reason to stay away from its stock.
2. Uncertainty Related To The Coronavirus
As the largest mall operator in the United States. And the largest retail Real Estate Investment Trust (REIT) in the world, Simon Property Groups is likely getting hammered right now.
This due to the lockdowns, quarantines, and now even after reopening far less traffic into their shopping malls.
Retail sales in general are still way down from their high levels before the pandemic hit in March.
And clothing sales specifically are still down 63.3% in the year to year period from May 2019 to May 2020.
With coronavirus cases now exploding in the US and worldwide people will continue avoiding retail stores for the foreseeable future… And that’s if these stores continue to remain open and not get shut down again.
Because of this many of its most valuable tenants can’t pay rent to Simon.
Some tenants haven’t paid their rent to Simon since April 2020.
That’s 4 months as of this writing without getting full revenue for the highly indebted company on the properties it owns and leases to these store owners.
What does that mean to you specifically?
A huge cut to the dividend for starters.
On June 30th, 2020 Simon announced that it was cutting its dividend 38% from $2.10 per share to $1.30 per share.
This is due to these lower payments and Simon’s structure as a Real Estate Investment Trust.
REIT’s are legally obligated to pay out 90%+ of their income as dividends to shareholders to keep their lower tax paying status.
But if the company isn’t generating any revenue or income than it must pay far lower dividends.
Most people who invest in REIT’s invest in them specifically for the dividend payments. So when this pandemic first hit in March Simon shares got crushed.
From a high of $149.11 per share back in January 21st, 2020 to $62.90 per share as of this writing.
Or a fall of 57.8 in 7 months.
This has led to Simon suing several of its tenants for not paying their leases.
But what compounds this for Simon is that while its malls were shut completely in the last few months… Many of its mall tenants are going bankrupt…
- JC Penney
- Lucky Brands
- J. Crew
Are just a few of the prominent names to file for bankruptcy since this pandemic started. And most of these companies’ stores are in malls.
Throw this lack of getting paid by its tenants, combined with their bankruptcies, combined with no end in sight to this coronavirus crisis and the largest mall operator in the US is in big danger of having to cut its dividend again.
And possibly going bankrupt due to lack of income.
This thesis to avoid Simon continued playing out after its latest earnings released on November 9th, 2020.
Revenue fell 22.5% in the year to year quarterly period to $$1.1 billion from $1.42 billion last year.
Operating income fell 42.7% in the year to year quarterly period to $404 million compared to $705.3 million last year.
And net income fell 72.9% in the year to year quarterly period to $0.48 per share compared to $1.77 per share last year.
This as malls continue to struggle after reopening… And tenants continuing to struggle paying their bills to Simon.
With coronavirus cases in the US exploding again and Joe Biden looking likely to become the next president… Could there be another lockdown?
If so, it would devastate many industries… But one of the hardest hit would be malls again.
Plus, Simon’s debt levels are now $ 1 billion higher than they were at the beginning of the year.
They jumped from $24.16 billion at the end of 2019 to $25.14 billion now.
This lack of revenue and profits, combined with the uncertainty of another lockdown, tenants not paying their bills, and huge debt loads could lead to disaster for Simon.
Which means you should avoid its stock – and the 6.6% dividend – at all costs.
Plus, I’ve already found many other better, safer, and potentially higher return investments for you…
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.