1 Dividend Stock Down 34% to Buy Hand Over Fist Right Now – The Motley Fool

Global warehouse giant Prologis (PLD 0.22%) has lost more than a third of its value over the past year. The primary factor weighing on the real estate investment trust’s (REIT) share price is the concern that rising interest rates could push the global economy into a recession. That would impact the demand for warehouse space.

However, this sell-off looks like a great buying opportunity. With the stock price slumping, the industrial REIT‘s dividend yield has risen to around 2.8%, which is quite a bit ahead of the S&P 500‘s 1.6% dividend yield. Meanwhile, Prologis has enormous built-in growth. That sets it up to potentially produce attractive total returns in the coming years for investors who buy right now.

A rock-solid payout

Prologis has been a great dividend growth stock in recent years. The REIT has grown its payout at a 12% compound annual rate over the last five years, including giving its investors a 25% raise earlier this year. That’s double the growth rate of other REITs (6%) and even faster than the S&P 500’s pace (5%).

The industrial REIT’s current dividend is on rock-solid ground. Prologis has a conservative dividend payout ratio for a REIT at around 60% of its adjusted funds from operations (FFO). That has it on track to produce $1.7 billion of post-dividend free cash flow this year. This financial flexibility allows it to make acquisitions and invest in development projects.

Prologis also has one of the strongest balance sheets in the REIT sector. It has A-rated credit backed by a low leverage ratio and lots of liquidity. That gives it even more financial flexibility to fund new investments. On top of that, Prologis has a large investment funds management business, providing it with additional liquidity sources to finance new investments.

Built-in growth

Prologis doesn’t need to make outside investments to grow. That’s because there’s a massive 50%+ gap between the rental rates on its existing leases and current market rates. As those leases expire, Prologis can sign new ones at higher market rates. The company estimates that its same-store net operating income will grow at an 8% to 10% annual rate for the next several years as existing leases roll over to market rents.

That’s assuming no further rent growth, which seems unlikely. While rents might not grow as fast in the near term if there’s a recession, they should still head higher in the coming years because of the continued growth of e-commerce and other demand drivers like reshoring and supply chain resiliency. Continued rent growth would enable Prologis to grow even faster.

In addition, the company recently acquired its largest rival, Duke Realty, in a $26 billion deal. The company expects the merger will increase its core FFO per share during the first year. Meanwhile, it sees future cost savings boosting its bottom line further.

On top of that, Prologis has several development projects under construction. They should provide it with some incremental income as they stabilize in the future.

Beyond all that built-in growth, Prologis has the financial flexibility to continue making acquisitions and investing in development projects. The company has a vast land bank to support future developments. While it has slowed its development pace this year because of current economic uncertainty, it can quickly accelerate when the economy improves. Meanwhile, a downturn could provide the company with more acquisition opportunities if sellers need to unload their properties because of rising interest rates or other factors. Further investments could provide an additional boost to its FFO growth rate in the future.

This top-notch dividend growth stock is on sale

Shares of Prologis have been under pressure because of concerns about its ability to grow if there’s a recession. Those fears seem unfounded because the company has enough embedded drivers to grow at an attractive rate for the next several years. The 34% sell-off looks like a great opportunity to scoop up this top-notch dividend growth stock at an attractive value.