This article originally appeared on The DIV-Net March 30, 2009.
Linked here is a detailed quantitative analysis of Federal Realty Investment Trust (FRT). Below are some highlights from the above linked analysis:
Company Description: Federal Realty Investment Trust is an equity real estate investment trust that specializes in the ownership, management and redevelopment of community and neighborhood shopping centers.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
FRT is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, FRT is trading at a 18.2% discount. FRT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
FRT earned one Star in this section for 3.) above. FRT has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 41 consecutive years. Last year’s dividend payout was 114%, up from 92% in 2007. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section. The payout ratio is high because U.S. REITs are required to distribute at least 90% of their taxable income to their shareholders under §857 of the Internal Revenue Code.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
FRT earned both of the available Stars in this section. The NPV MMA Diff. of the $10,693 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as FRT has. FRT’s current yield of 5.95% exceeds the 3.39% estimated 20-year average MMA rate.
Other: FRT is a member of the Broad Dividend Achievers™ Index. FRT should continue to see healthy operating results and benefit from its geographic, customer and property-type diversity. As an owner of shopping centers in relatively affluent metropolitan markets, FRT’s position is somehat protected with barriers to entry. FRT should see solid growth from planning and managing its mixed-use communities. Risks include declining retail expansion, condominium sales and an interest rate increase.
Conclusion: FRT earned one Star in the Fair Value section, did not earn any Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks FRT as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $67.93 before FRT’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 3.83%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is -3.7%. This negative dividend growth rate is well below the 3.2% used in this analysis, thus providing a margin of safety. FRT has a risk rating of 1.75 which classifies it as a medium risk stock.
FRT is an interesting stock. I am impressed with its long string of dividend increases and seven consecutive years of positive free cash flow. Most REITs tend to generate negative free cash flow in a number of years. However, its debt to equity of 51% is a little higher than I like to see. Although FRT is trading below my buy price of $53.47, my real estate allocation is well covered at this time. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in FRT (0.0% of my Income Portfolio).
What are your thoughts on FRT?