The stock market keeps hitting all-time high after all-time high, with many trusted valuation indicators suggesting wild overvaluation. However, there are always stocks and industries that are out of favor for some reason and trading at bargain prices. Two investment options you should be looking at today as you search out bargains are high-yielding Tanger Factory Outlet Centers Inc. (NYSE:SKT) and Buckeye Partners, L.P. (NYSE:BPL).
Retail’s death is greatly exaggerated
If you believe the news headlines, you might get the impression online retailers are going to completely replace physical retail stores. But then why did Amazon.com, the 800-pound gorilla of online retailing, start opening physical bookstores and buy a bricks and mortar grocery store? Yes, the retail sector is going through a major change right now, but physical storefronts will remain important for many years to come. This is why I’m fond of real estate investment trust (REIT) Tanger.
Tanger owns or has a stake in 44 factory outlet centers in the United States and Canada. Outlets have a unique position in the retail arena because they provide shoppers with bargains during flush times and an opportunity to save money when finances are tight. Tanger has a long and successful history in the space, which is shown most clearly by its 24 years of consecutive annual dividend increases. That span includes the deep 2007 to 2009 recession that led many other REITs to cut their dividends.
Also noteworthy is the fact that Tanger’s occupancy has remained at 95% or higher since it came public in 1993. Put another way, retailers were still renting space in the company’s outlet centers in both good years and bad. There’s no question that the names in the retail sector are changing today, as are the way retailers reach customers, but I believe Tanger’s outlet centers will continue to be a draw just like they have been in the past.
Tanger’s stock, though, is around 40% below the highs it reached in 2016. And its yield, at 5.45%, is near the highest its been since the last recession. If you believe physical retail is dead, don’t buy Tanger — but if you see the retail apocalypse hype as a little overdone, then Tanger appears to be trading at bargain prices today.
Light on coverage
Buckeye Partners hails from the oil and natural gas midstream space, where it owns pipelines, ports, and storage infrastructure. These are largely fee-based assets that are backed by long-term contracts. That provides a fairly stable stream of cash to back this partnership’s 9.3% yield. The distribution, meanwhile, has been increased every single year for 22 consecutive years. The last hike came in May of 2017.
The problem here is that Buckeye’s distribution coverage has fallen below 1. Investors don’t like to see that, but it isn’t the first time this partnership has slipped below that crucial figure as it executes its growth plans. For example, coverage dipped below 1 in 2013 and 2014 before bouncing back the next two years. The current drop in the coverage ratio is largely because of Buckeye’s purchase of 50% of VTTI to expand its global reach in the storage business.
If history is any guide, coverage will improve as that investment starts to contribute more to the overall business. But that’s not the only thing going on at the partnership. It’s is also in the process of building pipelines in Texas, Michigan, and Ohio, and putting capital to work at key energy hubs in New York and in the Caribbean.
Partnerships grow by investing in new and existing assets. This is a period of growth for Buckeye. As the spending winds down and the assets start generating cash, investors are likely to look back today’s over 9% yield as see that it was a great opportunity to buy an out-of-favor name (the units are down 35% since their 2014 highs) with a long history of success behind it. Yes, distribution coverage is tight today, but its growth plans suggest that’s a temporary issue.
There are some warts
There’s no question that Tanger and Buckeye come with risks. All shopping could suddenly be done only online, and Buckeye’s new investments could take longer to ramp up than expected. But both of these companies have long histories of successfully running their businesses and rewarding investors well along the way with growing disbursements. They are definitely out of favor for a reason, but I think the negatives will be transitory. Now is the time to pick up these bargains if you can stomach a little uncertainty.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer owns shares of Tanger Factory Outlet Centers. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.
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