Investor appetite appears to be relatively flat in 2023. After all, the coasting nature of the UK’s flagship indices doesn’t exactly spark much enthusiasm.
However, while many investors are sitting idle, plenty of businesses are moving forward. As such, some valuations are still looking cheap with several income stocks offering substantial dividend yields.
LondonMetric Property (LSE:LMP) is one example of a business that continues to expand its cash flows, dividend, and growth prospects despite the share price remaining depressed. In fact, this firm is on my personal long-term buy-and-hold list this month. Let’s take a closer look.
Investigating a 5.3% dividend yield enterprise
For those who haven’t come across this business, LondonMetric Property is a real estate investment trust (REIT). It owns, maintains, and leases a portfolio of commercial properties across the UK – predominantly warehouses for e-commerce businesses.
With interest rates rising, mortgages have gotten more expensive. Consequently, property values have dropped. And since REITs typically trade close to the net asset value of their real estate portfolio, these types of shares have taken a tumble. Looking specifically at LondonMetric, the share price is down almost 30% over the last 12 months.
As frustrating as this has been for shareholders, the decline in market capitalisation has pushed the dividend yield up. And it now sits at a tasty 5.3%.
Is this sustainable? In my opinion, yes. Or at least that’s the impression provided by the latest earnings report that showed occupancy rising to 99.1%, a net rental income expansion of 11%, and dividends per share rising by 2.7%.
What’s more, this growth is potentially set to accelerate. Management has recently announced plans to acquire one of its chief competitors for £198.6m. This deal is expected to increase rental income by a further £18.2m while simultaneously increasing LondonMetric’s national footprint.
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What are the risks?
While cash flow and growth are heading in the right direction, there’s no guarantee this will continue. Interest rate hikes to combat inflation might not be over, placing further pressure on the group’s share price and debt servicing costs.
Meanwhile, the latest acquisition announcement has some investors on edge. LondonMetric ended up paying a premium of around 34.3%. That’s certainly not as bombastic as other takeover deals seen in the last couple of years. However, given the current economic environment, it’s a hefty price tag to pay for a real estate firm.
Should the integration of its rival’s property portfolio become troublesome, this deal could backfire, incurring additional costs that may compromise the dividend yield.
However, given this possibility seems to already be partially baked into the share price, it’s a risk I’m willing to take with my income portfolio.
The firm has an impressively consistent track record of incrementally increasing rental income as well as dividends. And while any further declines in property valuation will likely drive down the share price over the next 10 years, this downward pressure is likely negligible.
