Stocks which pay unbroken dividends for decades are relatively rare. But one sector which is capable of providing a reliable income over long periods is commercial property.
Long leases mean that rent payments are generally visible for many years ahead. The main risk is that over-expansion during boom markets can lead to debt-fuelled losses during downturns.
Today I’m looking at two property stocks that continued to pay dividends throughout the financial crisis, albeit at a reduced level. Is either of these firms a potential lifetime income buy today?
Big boxes are in demand
Since restructuring in the wake of the financial crisis, FTSE 100 firm Segro (LSE: SGRO) has focused on building and owning big box distribution centres in the UK and Europe.
It’s a strategy that’s worked very well, enabling the firm to avoid the troubled retail sector and profit from the growth of internet shopping.
In its first-quarter trading update today, chief executive David Sleath reported “a strong start to 2018”. Mr Sleath said that the group contracted £27.3m of new rent during the quarter, compared to £16.3m during the same period last year.
Of this, £23.3m, or 85%, came from pre-lets on buildings that aren’t yet complete. That’s an increase from 65% a year ago. This highlights the strength of demand for logistics properties at the moment, but I wonder if it’s also a sign that this market could be getting a bit peaky.
Numbers are still good
The risk for investors is that Segro stock now trades at a 13% premium to its last-reported net asset value of 556p per share. This normally only happens to property stocks during a bull market, when investors are confident that asset values will keep rising.
Any sign that the market is flattening out could trigger a sharp fall in the group’s shares.
However, there’s no sign of this yet and the group’s financials still seem fairly attractive. Today’s update confirms that net debt remained flat at £2.4bn in Q1, giving an unchanged loan-to-value ratio of 30%.
Segro’s dividend yield has now fallen to below 3%, which is too low for me. But this could still be a good long-term income buy.
This 5% yield looks cheap
Real estate companies specialising in retail property have seen their shares falling steadily over the last year. Rising levels of financial distress among retailers mean that an increasing number of landlords are being asked to accept rent reductions, or face the risk of empty units.
This problem was highlighted by FTSE 100 retail landlord Hammerson (LSE: HMSO) today, when the board withdrew its recommendation for a planned takeover of rival Intu Properties. The firm’s comments seem to suggest that major shareholders may have opposed the deal.
A buying opportunity?
Weak market sentiment in recent months has left Hammerson stock trading at a 35% discount to its net asset value of 790p. The firm’s board now plans to tighten its focus on high-growth premium properties in the UK and abroad. It will also review planned projects to make sure they still offer suitable levels of return.
The stock’s discount to book value means that its dividend yield has risen to a generous 5.4%.
I think there’s a risk that it’s still too soon to buy, but I would be happy to consider a starter position at this level.