Stag Industrial(NYSE: STAG) is a relatively new company, launched a dozen years ago to acquire and operate single-tenant industrial properties across the U.S. Good timing.
The Boston-based real estate investment trust (REIT) was, of course, jumping on the logistics space bandwagon from the get-go, but then it went along for the ride when the pandemic threw gasoline on the smoldering fire.
Demand soared for supply chain space for business-to-business and business-to-consumer shipping, and grew further with the shift from just-in-time to just-in-case manufacturing and warehousing. And the trend of high occupancy and rising rents appears to be continuing domestically and globally.
Image source: Getty Images.
Outpacing the broader market
Stag has also grown, now boasting a collection of 568 buildings in 41 states, a portfolio that has been pumping out enough cash to push the total return of its stock to market-beating levels.
This chart shows how handily Stag stock has outpaced the S&P 500 -- as represented here by the Vanguard S&P 500 ETF -- since the company went public in 2011.
Data source: YCharts
Looking at it in dollar terms, a $10,000 investment made in Stag at its initial public offering (IPO) price of $13 a share would now be worth $66,870, compared with $48,930 for that Vanguard exchange-traded fund.
Why the payouts should get even better
Two factors to consider now are the company's ability to support that dividend and continue raising it. Both look promising.
First, in its third-quarter earnings report, Stag said that core funds from operations (FFO) were up 3.8% so far this year from the first three quarters of 2022. FFO is a key measure of recurring operating earnings, the cash that REITs use to meet their legal obligation of paying out at least 90% of their taxable income as dividends.
Meanwhile, a modest payout ratio of about 58% based on cash flow points to the ability to sustain and, better yet, increase the current dividend of $0.1225 paid monthly. Stag has raised its dividend each year for the past five, but modestly: only a total of about 3.5% over that time.
A rock-solid balance sheet and growing portfolio that's nearly completely occupied point to room for more impressive dividend growth to go along with the income from its growing portfolio (14 new properties so far this year while disposing of five). Meanwhile, this is still a reliable dividend machine in a solid sector that itself has room to grow.
Spreading the risk and the wealth
Stag is firmly ensconced in the industrial-space market and its fortunes, and its stock price, can be expected to follow that broad sector's trajectory. But it does spread the risk more than is typical for a logistics REIT.
For instance, Stag's largest tenant is Amazon, but that e-commerce giant only accounts for about 2.7% of Stag's annual rent, and the top 10 only account for about 10%. (That compares with 5.1% and 14.6%, respectively, for Prologis, the giant industrial REIT that ranks as the world's largest logistics space owner.)
By industry, Stag's air freight and logistics business provides only 11.1% of its rent roll, with the top 10 sectors accounting for about 60%. By geographic market, Chicago tops the list at 7.1%, with the top 10 accounting for 39%.
Building on that diversification, Stag said in its fall 2023 investor presentation that about 30% of its portfolio is now located within a 60-mile radius -- about an hour's drive -- of "megasite projects."
Stag said those are "sites listed on the White House 'Investing in America' initiative that documents areas where public policy and private investment have combined to inject more than $464 billion in private investment across electric vehicles, batteries, semiconductors, and electronics since 2021."
A solid position in current and future supply chains, a rock-solid balance sheet, and a growing, profitable portfolio point to Stag as an investment to consider for both its strength as a passive income play and potential for future capital appreciation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Marc Rapport has positions in Amazon, Prologis, and Stag Industrial. The Motley Fool has positions in and recommends Amazon, Prologis, Stag Industrial, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
