Yahoo Finance Nine years of dividend growth plus cheap valuation make this property stock good for income
The Bank of England is widely expected to raise interest rates for the 13th time in succession next week. Indeed, annual inflation of 8.7pc is more than four times the central bank’s 2pc target.
With wages rising at their fastest pace for 20 years, excluding the pandemic, and core inflation increasing to its highest level since 1992, there are fears that rampant price rises could prove to be sticky.
Increases in Bank Rate, of course, mean the return on cash savings is likely to rise over the short run. Some income investors may therefore argue that cash savings offer significant appeal.
As well as providing a relatively generous 4pc yield today, they offer the prospect of a growing income return over the coming months. For example, a one percentage point rise in interest rates would equate to a 25pc increase in the income return provided by easy access savings accounts that currently yield 4pc.
However, in Questor’s opinion, this viewpoint is severely flawed and short-sighted. While interest rates are very likely to rise in the short run, they will not increase in perpetuity.
Ultimately, inflation will moderate and the Bank of England’s dabble in monetary policy tightening at breakneck speed will end. It could even be reversed. As a result, savers will ultimately experience a lack of growth, or even a decline, in their level of income that negatively affects their living standards.
Conversely, investors in dividend stocks such as Sirius Real Estate can expect to receive an ongoing rise in their income over the long run. The property company, which owns business and industrial parks in the UK and Germany, has grown dividends per share for nine consecutive years.
In its latest financial year, on which it reported last week, it raised dividends per share by 29pc following upbeat financial performance.
The company’s annualised like‑for‑like rental income increased by 7.7pc due to strong occupier demand.
This contributed to a 25pc rise in adjusted pre-tax profit and a 1.1pc increase in its investment property book value.
It was able to grow net asset value (NAV) per share by 0.6pc despite property market weakness amid a tough economic period for the UK and Germany.
Indeed, GDP growth in both countries is expected to lag other developed economies this year. The OECD, for example, forecasts that the UK economy will expand by just 0.3pc in 2023, while it expects Germany’s GDP growth to be zero.
However, next year’s forecasts of 1pc (UK) and 1.3pc (Germany) growth represent a significant improvement that, if met, could strengthen Sirius Real Estate’s operating environment.
The company’s solid financial position means it is able to capitalise on a weak near-term economic outlook via asset recycling.
In its latest financial year, for instance, it disposed of several properties that lacked growth opportunities at a premium to book value and spent €45m (£39m)on acquisitions with relatively attractive yields and opportunities to add value.
With a cash balance of €124m, a net loan-to-value (LTV) ratio of 42pc and 95pc of its debt being at fixed rates for a minimum of over three years, it has the financial means to continue to use market weakness to its advantage.
Since being added to our income portfolio in November 2019, the stock has paid dividends that amount to 20pc of its notional purchase price. And even after generating capital growth of 19pc to produce a total return of 39pc, it still offers a relatively attractive yield of 5.5pc. When combined with its potential to raise dividends at a brisk pace as the economy’s outlook improves, this suggests it has significant appeal from an income investing standpoint.
Trading on a price-to-book ratio of around 0.9, Sirius Real Estate offers a wide margin of safety during an uncertain economic period that could prompt a decline in property prices over the short run. Its low valuation also provides scope for long-term capital gains as the current era of rampant inflation, rapidly rising interest rates and sluggish economic growth abates.
Therefore, the stock remains a worthwhile holding in our income portfolio. Its sound financial position, excellent track record of dividend growth and capacity to capitalise on a tough operating environment suggest it has not yet fulfilled its potential.
Questor says: hold
Ticker: SRE
Share price at close: 87.9p
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