O - Kimco Realty: Buy The Drop A Covered 4.5% Yield Is Waiting For You

2023-03-09 12:09:24 ET

Summary

• Kimco Realty Corporation covered its raised dividend easily with FFO in 4Q-22.
• Low payout ratio points to dividend growth.
• Kimco Realty’s stock is now valued at just 13x FFO.

Kimco Realty Corporation ( KIM ) stock price weakness, in my opinion, is a buying opportunity for passive income investors.

Kimco Realty provides three major benefits to investors looking for high-quality dividends, including a fundamental recovery in its lease business, a very low payout ratio that points to dividend increases, and a compelling valuation based on funds from operations, a key metric for real estate investment trusts, or REITs, that reflects a high margin of safety.

Kimco Realty stock is currently trading at 13x FFO and pays a 4.5% dividend yield that is covered by cash flow to passive income investors. The REIT's stock is a buy on the drop.

Ongoing Portfolio Recovery

Kimco Realty has seen a gradual improvement in key performance metrics such as occupancy rate and rent per square foot growth as the real estate market has tightened following the Covid-19 pandemic.

In terms of occupancy, Kimco Realty's business recovered all losses suffered during the Covid-19 pandemic in the fourth quarter.

The real estate investment trust reported an occupancy rate of 95.7%, which was 0.4 percentage points higher than the trust's 3Q-22 occupancy. The occupancy rate at the end of the fourth quarter also surpassed the occupancy rate of 95.6% in 2Q-22 for the first time in nearly three years.

Kimco Realty's KPIs deteriorated in the second quarter of 2020 as a result of the impact of Covid-19. Furthermore, strong demand for lease space in Kimco Realty's shopping centers has resulted in additional rent growth in 4Q-22.

Rent per square foot, another key performance metric for REITs besides occupancy and FFO, increased 1.2% QoQ to $19.66, which is 9.5% higher than in the quarter just before the Covid-19 pandemic.

Necessity-Based Anchor Focus Is Driving Recovery Gains

Kimco Realty's lease strategy includes large, omnichannel retailers as well as smaller shops that cater to people's basic needs. As a result, Kimco Realty's shopping centers are focused on necessities such as restaurants, pharmacies, and grocery stores. Grocery-anchored centers account for approximately 81% of the trust's annualized base rent. The trust's reliance on necessity-based shopping centers ensures a consistent flow of traffic to Kimco Realty-owned locations and translates into predictable operating funds.

Kimco Realty Has A Lower Payout Ratio (Safer Dividend) Than Realty Income

Kimco Realty reported $0.38 in funds from operations ("FFO") per share for the fourth quarter, easily covering the $0.23 per share quarterly dividend.

Kimco Realty increased its dividend three times in 2022, the most recent time in the fourth quarter, when it increased by $0.01 per share to a current payout of $0.23 per share per quarter.

In the December quarter, the total dividend payout ratio was approximately 61%, compared to a twelve-month payout ratio of 53%. I believe the dividend is well covered by FFO and has the potential to grow in 2023.

Furthermore, Kimco Realty's dividend payout ratio appears to be higher than that of Realty Income Corporation ( O ) , one of the most admired retail REITs in the industry. Realty Income had a payout ratio of 76% in 2022 , implying that Kimco Realty provides a safer dividend to passive income investors than Realty Income.

Kimco Realty Is Trading At A Compelling FFO Multiple

Now that Kimco Realty stock has returned to the $20 range, the FFO multiple has become even more appealing and reflects a higher margin of safety.

Kimco Realty has set a target of $1.53 to $1.57 per share in funds from operations for 2023.

Kimco Realty's stock price has dropped from $23.50 to $20.50 in February and March 2023, implying an FFO multiple of 13.2x. For comparison, Realty Income trades at an FFO multiple of 16.2x.

Why Kimco Realty Could See A Lower Valuation

Kimco Realty is a shopping center-focused real estate investment trust that relies on both strong retail spending and the financial stability of its tenant base.

A downturn in the economy would likely be the most significant headwind for Kimco Realty, but given that the real estate investment trust has a payout ratio of around 53%, the dividend should be safe.

A decline in occupancy and a slowing increase in rent per square foot are two potential headwinds for the retail REIT.

My Conclusion

Kimco Realty, in my opinion, is a highly appealing dividend stock for passive income investors seeking a 4.5% dividend yield from a well-managed retail REIT.

In my opinion, the grocery anchor focus and the recovery in occupancy following the pandemic are two compelling reasons to invest in Kimco Realty Corporation.

Furthermore, the REIT stock is valued at 13.2x funds from operations, and the payout ratio of 53% in 2022 strongly suggests that the Kimco Realty Corporation dividend has upside potential as well.

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