Born-again business Lloyds Banking Group (LSE: LLOY) has now escaped from state ownership, leaving the taxpayer with a modest profit. Its improving outlook has even convinced banking cynic and income fund manager Neil Woodford to buy Lloyds shares for his funds.
Does this mean it is now officially the best dividend stock in the FTSE 100? Perhaps. But there are some potential alternatives.
FTSE 100 property group Land Securities Group (LSE: LAND) saw its underlying pre-tax profit rise by 5.5% to £382m during the year to 31 March. The group will pay a final dividend of 11.7p, lifting the total payout for the year by 10.1% to 38.55p.
Land Securities’ portfolio has two parts — prime London office and retail space, plus regional shopping centres and retail parks. Brexit hasn’t had much of an impact on the firm yet, but Thursday’s full-year results make it clear that it has made thorough preparations for a potential slowdown.
The group’s loan-to-value ratio is just 22.2%, which is much lower than most peers. Land Securities’ average unexpired lease term is 9.1 years, the longest on record for the firm. Financing is in place to match this. The group’s outstanding debt has an average of 9.4 years until maturity and its average interest rate fell from 4.9% to 4.2% last year.
This all adds up to a very robust picture, in my view. The only potential risk is that vacancy levels across the like-for-like portfolio have increased over the last year, rising from 2.4% to 4.6%. This needs watching, but I think it’s likely to be a short-term concern. Land Securities properties are generally of high quality and in good locations. Historically, demand for such properties — especially in London — usually remains firm over long periods.
It currently trades at a 22% discount to its adjusted net asset value of 1,417p per share, and offers a 3.5% dividend yield. In my opinion, the shares could be a good long-term income buy for UK investors.
Lloyds’ yield is nearly double
It’s true that Lloyds offers a forecast dividend yield of 5.7%, nearly double that of Land Securities. But the bank’s long-term income is dependent on many of the same risk factors as Land Securities.
Just as a recession would hit demand for office and retail space, it would also be likely to affect the credit quality of Lloyds’ mortgage and credit card customers. New borrowing rates would probably fall, and arrears could rise sharply.
It may also be worth noting that while analysts expect Land Securities’ earnings per share to rise by 5% in 2018, Lloyds’ earnings are expected to fall by about 4% next year. The bank’s asset backing isn’t so strong either. Lloyds’ current share price of 71p represents a 25% premium to its tangible net asset value of 56.5p per share. That’s a perfectly reasonable valuation for a healthy, profitable bank, but means the downside protection is limited if earnings slump.
Although Lloyds’ turnaround has been mightily impressive, it remains to be seen whether the bank can now deliver stable earnings and dividend growth over long periods. But my overall view is that both Lloyds and Land Securities are attractive long-term income buys at current levels.