A Fat Payout May Get Even Richer

 | Jun 09, 2013 | 6:00 PM EDT  | Comments
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The CEO of Parkway Properties (PKY), James Heistand, scooped up 50,000 shares of the company's stock last week, according to an SEC filing. Insider purchases are often taken as bullish signals, and studies do say that such stocks tend to narrowly outperform the market. After all, unless these executives are particularly confident in the company, they wouldn't otherwise wish to further increase their risk to the stock.

In any case, as far as Parkway is concerned: Shares are up 18% year to date, but the stock price peaked in mid-May and has since fallen 13%. Heistand likely believed that this created a buying opportunity for the shares, although we'd note the price has risen a bit from where he bought.

Parkway is a real estate investment trust that focuses on office properties primarily located in the Southern and Southwestern U.S. In the first quarter, funds from operations came in at $17 million, up 71% year over year. (For REITs, analysts normally use "funds from operations" as their key metric, instead of earnings, in order to correct for the value of the firm's real estate.) If we annualize that figure and compare it with Parkway's current $1.2 billion market capitalization, we get a P/FFO multiple of 18x. Of course, it's possible that the company's FFO will continue growing over the course of this year, given last quarter's strong growth.

Because REITs receive favorable tax treatment if they pay out large dividends, their yields are often very attractive -- and Parkway currently pays out $0.15 per share each quarter, for a current annual yield of 3.5%. The dividend has undergone two hikes in the past year, doubling the distribution in all. But we would note that Parkway's dividends are less than half of what they were at the end of 2009, so investors would clearly be at risk during any real estate downturn. In addition, while the current yield is high, it doesn't touch what can be found at other REITs, and at many blue-chip consumer stocks.

Given this, the case for Parkway seems to rest on the presumed continued rise in FFO, and the expectation that this will bleed through to higher dividends. Note, again, that the doubled dividend has come alongside a 71% climb in FFO -- so these large increases can quite directly link to more generous payouts. Of course, an FFO climb depends on further improvements in the commercial real estate market, particularly in the Sunbelt geography where the company is focused.

That said, an income portfolio should be rooted in large-cap stocks with only limited exposure to REITs at all -- and we're sure that many income investors would prefer to commit their REIT capital to higher-return opportunities, even if they are high-risk. In addition, we've seen that the flip side to FFO growth and higher dividends is a substantial reduction from poor market conditions.

Still, it is positive to see the CEO buying here, and certainly as long as FFO growth persists we'd guess that Parkway will continue to hike its dividend, potentially leaving current investors with quite an attractive yield. Taking all this into account, Parkway may be worthy of further research if the yield and risk profile look appealing to you.

-- Written by Matt Doiron

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