As the famous 19th-century stock investor Russell Sage once said, “I bought straw hats in winter, and now they’re worth a fortune.”
That was Sage’s way of saying to buy quality stocks when both demand and price are low. And 2022, with its 8% inflation and interest rate hikes, gave dividend investors plenty of straw hats from which to choose.
High-quality stocks on sale are a much better bargain than buying poor performers just because they’re cheap or the yields are high. If you can get a market leader when it’s down by 20% or more, that is the time to buy.
Take a look at one real estate investment trust (REIT) that, despite a rough 2022, has a long-term history that makes it a leader among similar REITs and has already demonstrated that 2023 could be a much better year.
Prologis Inc. PLD is a San Francisco-based industrial REIT that owns and manages almost 5,500 industrial logistics properties across the U.S. and in 18 other countries. Founded in 1983, Prologis has been a stalwart in appreciation among REIT stocks. It has the largest market capitalization of any REIT at $112.16 billion.
Since its inception in November 1997, Prologis has generated a total return of 629.27%, or 8.21% per year. Prologis’s appreciation performance has been stellar, but it’s never been known for generating a high dividend yield.
From 2018 to 2022, Prologis raised its quarterly dividend several times, increasing it from $0.48 to $0.79, but the yield remained low as the share price rocketed up by 95%. The annual dividend of $3.16 presently yields 2.5%, which is well below other REITs in its peer group. For a while in 2022, the dividend yield rose as high as 3.2% but has since fallen back as share prices have risen once more.
On Jan. 18, Prologis reported its fourth-quarter 2022 operating results. Net earnings per diluted share for 2022 was $4.25, compared with $3.94 for 2021. However, net earnings per share of $0.63 for the fourth quarter was a large drop-off from $1.67 in the fourth quarter of 2021.
Core funds from operations (core FFO) were $1.24, compared with $1.12 for the fourth quarter of 2021. Core FFO of $5.16 for all of 2022 was well above the $4.15 for 2021. Average occupancy was 98.2%, with a retention rate of 82% and full-year rent growth of 28%.
Despite these numbers, Prologis shares had a total 2022 return of negative 29.72%. Interest rate hikes slammed Prologis’s stock price from $164 in January to a low of $98 in mid-October. And although it’s bounced back to nearly $125.69 since, Prologis remains well below its all-time intraday high of $171.05 in April 2022.
One problem to note going forward is that Prologis has already forecast that it expects its occupancy rate to decline from over 98% at the end of December to a range between 96.5% and 97.5% for 2023.
Prologis is still guiding forward FFO for 2023, including promotes, in a range from $5.40 to $5.50 per share. Using the mid-point of $5.45, that easily covers the forward dividend with a payout ratio of 57.9% and comfortably allows for at least one more dividend increase in 2023.
Prologis is up 11.54% since the New Year dawned and has now crossed back above its 200-day moving average. While that is positive, it may have come too far too fast and appears to be overextended with a stochastic oscillator that’s now overbought at 95.
It would appear that Prologis, still well off its 2022 highs, could be a good buy at this level, but it’s not hard to imagine a pullback to between $116 and $120 before it once again begins to ascend above current levels. On any pullbacks, Prologis looks like a pretty good “straw hat” for 2023.
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