Down But Not Out: Buy These Battered Dividend Stocks Before They Blow Up Again
RReal estate investment trusts (REITs) have sold off this year on fears of a recession as interest rates rise. This worries investors about their near-term growth prospects.
However, as the market focuses on the short term, several REITs benefit from major long-term growth drivers that remain firmly in place. Three that stand out to our contributors are Alexandria Real Estate Stocks (NYSE:ARE), International Crown Castle (NYSE: CCI)and Prologis (NYSE: PLD). Here’s why they think dividend investors should buy these REITs – which now offer even higher prices dividend yields — before the market realizes they have a lot of growth ahead.
A life sciences-focused office REIT
Brent Nyitray (Alexandria Real Estate Stocks): SCPI in office real estate (REITs) have been under a cloud since the COVID-19 pandemic proved that the work-from-home model is a legitimate and efficient way for companies to do business. Employees generally like the idea, although employers were less enamored with the model. That said, not all industries are well suited to a work-from-home model, and that’s where Alexandria comes in.
Alexandria focuses on two types of businesses: high technology and life sciences. Its main tenants are life sciences companies such as Bristol Myers Squibb, Modernand Illuminated. Other major tenants include the US government and UberTechnologies. Life science companies typically require sophisticated lab spaces, and these companies are generally not conducive to the work-from-home model.
Alexandria was the forerunner in the life sciences space, and it is difficult for a new entrant to compete given that Alexandria has a long history of working with these companies and the regulators that established many of the requirements.
Alexandria has been beaten so far this year as REITs have been under cloud. It disappointed on its first quarter numbers; however, it recently increased its dividend. Much of the bad sentiment is due to rising interest rates, as REITs often trade on dividend yields. Alexandria is trading with a dividend yield of 3.3%, which is close to the highs of the past five years.
Alexandria will continue to benefit from increased life science research and development spending and is the market leader in life science office space.
This tower titan is transitioning to small cells
Mark Report (Crown Castle International): Shares of Crown Castle International have fallen with the market and are now down around 19% year-to-date. This looks like a buying opportunity, for three good reasons.
First, the Houston-based company has built an impressive record of returns for investors. It has built and rented mobile phone towers, benefiting from the growth of this industry (and the major operators that depend on this infrastructure). Crown Castle opened in 1994 with 133 towers, went public in 1998 with around 1,400 of them, and now has over 40,000. Since that IPO, that stock has more than tripled full return of the S&P 500, turning a $10,000 investment into about $177,000.
Second, Crown Castle says the tower’s space applications business remains strong while the company simultaneously aggressively moves forward in deploying small cell nodes and other data storage and distribution technologies that support new wireless capabilities generation.
Company CEO Jay Brown said 2022 is “a significant year of transition” as Crown Castle begins adding small cell nodes at a rate expected to reach 10,000 per year by next year. . It already has about 115,000 on air or on standby and more than 80,000 miles of fiber optic cable installed.
Third, revenues and profitability continue to grow with organic revenue growth for this business expected to reach 6% this year, the same percentage expected for growth in funds from operations (FFO). In total, the company expects its role in expanding 5G networks to support dividend-per-share growth of 7% to 8% per year.
That would keep pace with annualized dividend growth of 8.5% over the past three years. CCI stock is currently yielding around 3.4% at a price of around $170, and analysts give it a price target of around $197. Seems reasonable for the future buy and hold equity.
The demand for warehouse space remains roscrew up
Matt DiLallo (Prology): Prologis shares have fallen more than 30% from their recent high. The catalyst was the news that Amazon has more storage space than it currently needs. This leads the e-commerce giant to lose at least 10 million square feet of space.
With Amazon flooding the market with excess warehouse space, this could cool rental rates, which have been searing. Rents rose 20% globally last year. Prologis was anticipating similar growth in 2022 when it released its first quarter results shortly before the Amazon news.
While the slowdown in rental growth would affect Prologis, the Industrial REIT still has huge built-in upside potential. For starters, most of its existing leases are currently 47% below market rates on average due to the long-term nature of its contracts. When these leases expire, Prologis can capture an additional $1.6 billion in net operating income (NOI) by signing leases at market rates, assuming no further growth in rents. .
Meanwhile, the company is building more than $1 billion in new warehousing capacity to meet huge long-term demand for warehousing space as e-commerce continues to expand. It has already leased a significant portion of its development pipeline, meaning they will provide additional rental income when live.
Finally, the company recently agreed to buy its biggest rival, Duke Real Estate (NYSE: DRE), as part of a $26 billion deal. Duke also has a significant gap between its current rental rates and market rents and a significant development pipeline. For this reason, Prologis expects the agreement to immediately improve its results while improving its long-term growth prospects.
As Prologis shares tumble, its dividend yield is approaching 2.7%, its highest level in years. This higher yield might not last long. Shares of Prologis could rebound quickly as investors realize the company has a lot of potential, even if rent growth slows in the near term.
10 stocks we prefer to Alexandria Real Estate Equities
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brent Nyitray, CFA has no position in the stocks mentioned. Mark Report has positions in Alexandria Real Estate Equities, Amazon and Crown Castle International. Matthew DiLallo has roles at Amazon, Bristol Myers Squibb, Crown Castle International, Moderna Inc. and Prologis. The Motley Fool occupies and recommends Amazon, Bristol Myers Squibb, Crown Castle International and Prologis. The Motley Fool recommends Alexandria Real Estate Equities, Illumina, Moderna Inc. and Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.