Washington Prime Group: Why A Dividend Cut Is Very Likely

Co-produced with Samuel Smith
Despite Washington Prime Group (WPG) trading at a steep discount to net asset value today and offering investors a mouth-watering dividend yield of 27%, we remain on the sidelines for two reasons:
(1) We believe there are other opportunities that offer a better risk-reward proposition in the beaten-down retail REIT sector. (2) The combined uncertain macroeconomic outlook, retail sector headwinds, and strained cash flow situation at WPG will likely lead to a dividend cut in the near term In the remainder of this article, we will discuss our conviction for the second reason we are staying away from WPG common shares for now.

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Uncertain Macroeconomic Outlook
There have been numerous projections by the Federal Reserve and numerous other well-respected economists and businessmen that economic growth is likely to slow over the next several years, with some even calling for a recession to hit sometime in the next 6-18 months. While all of the major economic indicators such as the unemployment rate and GDP growth continue to signal a solid economy, there are numerous warning signs that a significant slowdown and/or recession may indeed be just around the corner. These reasons are, in our view, what has caused the Federal Reserve to reverse its strategy of raising interest rates toward a more “wait and see” – if not outright rate cutting – approach:
(1) Trading Partner Slowdowns: Data from major economies across the... Read more