STAG: Income from e-Commerce

05/09/2017 2:50 am EST

Focus: REITS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

Amazon (AMZN) tells a complete retailing story; despite already generating in excess of $100 billion in annual revenue, the firm revenue continues to grow at a 25% annual rate, notes Stephen Mauzy, contributing editor to the new advisory service, Ian Wyatt's Income & Prosperity

A lot of other companies will also sell you and me a lot of stuff online. The National Retail Federation expects U.S. online retail sales to grow 8%-to-12% annually, up to three times higher than the average growth rate of the entire retail sector.

Income investors have a tough time participating in e-commerce growth. But if you know where to look, you can participate in e-commerce growth and collect dividends that produce a 5.3% yield. 

An e-commerce sale, though occurring in cyberspace, must be fulfilled at a physical location. This is where STAG Industrial (STAG), an industrial REIT that owns 314 buildings across 37 states, comes in.

The majority of STAG’s properties are composed of standalone warehouses and distribution centers. STAG’s average building size is around 209,000 square feet, which ranks second among its REIT peers. Size matters for attracting large distributors, e-commerce or otherwise.

Most of STAG’s properties are located in secondary markets (those outside New York, Chicago, Los Angeles, and other major metropolitan areas).

STAG targets secondary markets for a reason: These markets generally provide less rent volatility and equivalent occupancy rates compared to primary industrial property markets. STAG’s occupancy rate — at 94.7% — for its entire portfolio backs its strategy of favoring the secondary over the primary.

STAG has ample opportunity to grow its warehousing empire. The market for warehouses and distribution centers is valued at over $1 trillion.

Property ownership is highly fragmented, with the largest owner controlling less than 3% of the market. STAG’s stated goal is 25% annual portfolio growth, mostly through acquisitions. The goal has so far been accomplished.   

As for the dividend, it, too, grows. Since its 2011 initial public offering, STAG has increased the dividend at a 6% average annual rate. STAG pays $0.117 per share each month. That sums to $1.40 per share annually. As I write, the dividend yields 5.3%.

The dividend also has ample opportunity to grow, because the dividend is easily covered by funds from operations (FFO). STAG reported first-quarter FFO of $0.42 per share, which beat expectations by a penny.

The dividend consumes $0.35 per share of that FFO per quarter. The increase in FFO enhances STAG's ability to pay the dividend; the lower payout ratio enhances STAG’s ability to raise the dividend. 

Yes, e-commerce growth has been impressive, and it will continue to impress through the remainder of the decade. For most income investors, e-commerce growth has been meaningless. That is, until now: STAG Industrial enables income investors to get a piece of the e-commerce action. 

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