Federal Realty: Long-Term Growth Expected for This Dividend King

The company is likely to offer double-digit annual returns with minimal risk over the next several years, thanks to its strong property portfolio

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May 29, 2019
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Federal Realty Investment Trust (FRT, Financial) is one of the best dividend stocks right now. The real estate investment trust has an exceptional growth record in funds from operations, the most impressive dividend growth record in the REIT universe and its business performance is remarkably resilient even in the most adverse economic environments.

Because Federal Realty is trading at a reasonable price, which is 22% lower than its peak three years ago, the stock is likely to offer double-digit annual returns in the upcoming years, with minimal risk.

Business overview

Federal Realty was founded in 1962 and focuses on high-income, densely populated coastal areas in the U.S. As a result, it is able to charge more per square foot than most REITs.

Many investors stay away from REITs due to the secular decline of malls and traditional retailers, which are facing the threat of the boom of e-commerce. U.S. retailers closed 5,994 stores in the first three months of this year, thus exceeding the 5,864 closures recorded throughout the whole 2018. Moreover, mall vacancy rates rose from 9.0% in the fourth quarter of 2018 to 9.3% in the first quarter of this year. This is the highest vacancy rate since the 9.4% recorded in the third quarter of 2011. These trends have scared many investors away from REITs.

Regardless, it is a shame to miss a resilient REIT like Federal Realty due to the above trends. The trust focuses on retail properties that offer unique experiences, so it is insulated from the threat of e-commerce. Its management also does its best to maintain a well-diversified asset portfolio. No tenant generates more than 3% of the total rental income and no single retail category comprises more than 9% of the total rental income. Grocers, full-price apparel stores, full-service restaurants and fitness centers generate approximately 9% of the total rental income each.

Growth record and prospects

The strength of the business model of Federal Realty is clearly reflected in its impressive growth record. The trust has grown its funds from operations per share every single year over the last decade and has thus posted record funds from operations for nine consecutive years. This enviable record amid the secular decline of traditional retailers can reassure investors that the company is laser-focused on the quality and the resilience of its portfolio.

Since the current CEO of Federal Realty took over in early 2003, the REIT has outperformed the other REITs and the S&P 500 index by a wide margin. Since 2003, Federal Realty has offered a 13.2% average annual return, twice as much as the 6.6% return of shopping center REITs. Moreover, during this period, S&P 500 REITs and the S&P have offered average annual returns of 9.7% and 9.0%.

Some investors may be disappointed by the 5.4% average annual growth rate of funds from operations per share in the last decade. However, the consistency and reliability of the performance of Federal Realty more than compensates investors for the somewhat modest growth rate. There are REITs that have attempted to grow faster, but have exhibited a more volatile performance and higher vulnerability to downturns.

Future growth of Federal Realty will be driven by higher rental rates on new leases and its promising pipeline of asset base expansion. We expect the company to keep growing its funds from operations per share near its historical rate.


Federal Realty currently offers a 3.1% dividend yield. As this yield is much lower than the yield of many REITs, the company passes under the radar of most income-oriented investors.

However, it has raised its dividend for 51 consecutive years. This is the longest dividend growth streak in the REIT universe and, hence, it is impressive. Thus, Federal Realty is the only REIT that belongs to the group of dividend kings, which have raised their dividends for more than 50 years in a row.

Moreover, the trust has grown its dividend by 7% per year on average throughout its 51-year growth streak. This pace is certainly sufficient to compensate investors for the modest current dividend yield. It is also worth noting the payout ratio currently stands at 64%, which is in line with the historical level. In fact, the payout ratio has remained within a markedly narrow range in the last decade, between 64% and 72%.

In addition, Federal Realty boasts of a rock-solid balance sheet, with an A- credit rating from S&P and Fitch. Therefore, given its healthy payout ratio, its promising growth prospects and its strong balance sheet, it is safe to assume the company offers a secure dividend, which will continue rising for several more years. Dividend safety is paramount during downturns, as it provides a growing income stream to the shareholders while it makes it much easier for them to retain their holdings amid poor market sentiment and thus prevents them from selling their holdings at the most unfortunate time.

Nevertheless, it is worth noting that Federal Realty has raised its dividend by only 2% per year on average in the last three years, so patience may be required until dividend growth rates returns to historical levels.

Valuation – Expected returns

Management has provided guidance for funds from operations per share around $6.38 this year. As Federal Realty has not missed the analysts’ estimates for 10 consecutive quarters, it is safe to expect the trust to meet this estimate, particularly given its enviable consistency. Therefore, Federal Realty is currently trading at a price-to-FFO ratio of 20.8, which is lower than its 10-year average of 22.7. In order to be somewhat conservative, we can assume a fair price-to-FFO ratio of 22.0 for this exceptional REIT.

If Federal Realty reaches our fair value estimate over the next five years, it will enjoy a 1.1% annualized gain thanks to the expansion of its valuation level. We thus expect the REIT to offer an approximate 9.7% average annual return over the next five years thanks to 5.5% annual growth of funds from operations per share, its 3.1% dividend and a 1.1% annualized expansion of its valuation level.

Final thoughts

Federal Realty is one of the best dividend stocks right now. It has an exceptional growth trajectory and an enviable dividend growth record while it is reasonably valued. As a result, it can offer an approximate 10% average annual return over the next five years. Given the resilience of this REIT even under the most adverse economic conditions, its expected return is attractive, particularly given the current phase of the economic cycle and the ongoing decade-long bull market.

Disclosure: I have no positions in any stocks mentioned.

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