"As investors, we feel akin to the residents of a City threatened by a hurricane. We know that there is a storm out there offshore, and the media is getting increasingly excited about all the dreadful damage that could occur. They may be right but dire predictions are good copy, and storms sometimes moderate or veer off in another direction. We batten down the hatches and, if we can, leave town, only to sneak back after the storm has passed to see that well protected property is still there and damage is generally less than predicted.
The two really dreadful property share markets in my lifetime have been 1973-75and 1989-92. Both came against the background of sky high interest rates, large scale overdevelopment and a sharp rise in unemployment which drove down rental values. We do not have overdevelopment today, no-one is forecasts sky high interest rates or a doubling of unemployment. So the fall in property values is a pricing issue.
For the moment uncertainty prevails and markets don't like it. All news is taken as bad news. What we can say is that, short of Armageddon, we have seen the worst of the share price falls in the well run well financed property companies.
I think that the point of maximum pessimism is still to be reached. An event may mark that point, but what event I cannot tell. That event could conceivably occur anytime now or it may still be twelve months away.
So we wait with our hatches battened down - staying in town as an investor dedicated to property - trying not to be too brave or too pessimistic. We will search for opportunities in others' distress and look forward to the day when we can report a return to decent growth."
Sunday, 23 December 2007
Property investment expert comments
I recently came accross this comment by Chris Turners the property manager in the Interim Statement for TR Property Investment Trust featured on www.iii.co.uk discussion board which I rather like and illustrates very vividly what situation we are in currently with respect to income generating property stocks.
Wednesday, 19 December 2007
Crystal ball gazing for 08
The secret of intelligent investing including income investing is sometimes to see beyond the here and now and go against the trend.
When everybody is telling you to sell, this can sometimes be the time to buy. In order to do this successfully investors sometimes have to look beyond the investment climate however stormy it might look.
Thinking of 08 one can only see dark clouds hiding possibly darker events for income investors. However, the events and the investments currently hardest hit could well turn out to be the best investments to hold.
I refer specifically to income generating property stocks. The FT this weekend had several articles about the prospect for income generating property shares. One highlighted the fact that the FTSE 350 Real Estate index has fallen a massive 43% in just 11 months. Some would argue it has further to fall. For instance the FT argues that in the property slump of the late 80's and early 90's the index fell 64% from it's peak in September 89 before bottoming out in September 92, therefore there are risks of buying in too early. However, the investment market is very different this time.
The economy is relatively strong with low unemployment and more importantly vacancy rates are low and there is not the over supply experienced in previous property booms. This means that as long as occupancy rates stay high then the income generating attractions of this asset class are strong.
So where next for income generating property stocks in 2008?
First of all. The credit crunch is biting. It's slowing investment. Economies such as the UK's which has been buoyed by consumer spending financed by cheap credit will slow in 2008. The Government and the Bank of England fearing a collapse in the housing market which would cause a melt down in the UK economy are likely to cut interest rates aggressively The Sunday Times has predicted that this could be done 4 times next year which would put the base rate at 4.5%. Falling interest rates suddenly stop making the returns on cash deposits look quite attractive. Suddenly the 8% plus income generated by some of the property stocks and share i have looked at start to look very attractive indeed, particularly when viewed against the already heavy discounts to asset values. Have a look at my previous article for some specific income generating property stocks to buy.
Appearance of property vulture funds in 08
I would expect to see in 08 the appearance of property vulture funds that are set up probably by hedge funds to fund the acquisition of property companies that are undervalued and/ or are having temporary funding problems because of the credit crunch. One likely victim would be Invesco Property Income Trust
Correction in property shares overdone
I am not alone in my view that the correction in property shares has been overdone. Anthony Bolton the widely respected fund manager was reported in the FT has started to buy property stocks, reportedly telling his special situations trust that there are discrepancies in valuations.
INCOME MONKEY VERDICT
I'm keeping the faith that i have expressed all along that there are some real income generating bargains amongst property shares if investors take a cautious and steady approach to buying. They should look to buy on weakness and average down where necessary. This is the approach i will continue to take into 2008. I'm confident that as the credit crunch unwinds, the economy cools and interest rates have fallen my investments in income generating property stocks will show a rebound in their capital value, a strong and growing dividend yield and look a damn sight more stable & attractive proposition than most other investments.
THE INCOME MONKEY WOULD LIKE TO EXPRESS ITS THANKS TO INTERACTIVE INVESTOR WHOS INFORMATION HAS BEING VITAL IN PUTTING TOGETHER THIS BLOG. I WOULD ALSO POINT OUT THAT THE INCOME MONKEY HAS NO ASSOCIATION WITH THIS WEBSITE.
When everybody is telling you to sell, this can sometimes be the time to buy. In order to do this successfully investors sometimes have to look beyond the investment climate however stormy it might look.
Thinking of 08 one can only see dark clouds hiding possibly darker events for income investors. However, the events and the investments currently hardest hit could well turn out to be the best investments to hold.
I refer specifically to income generating property stocks. The FT this weekend had several articles about the prospect for income generating property shares. One highlighted the fact that the FTSE 350 Real Estate index has fallen a massive 43% in just 11 months. Some would argue it has further to fall. For instance the FT argues that in the property slump of the late 80's and early 90's the index fell 64% from it's peak in September 89 before bottoming out in September 92, therefore there are risks of buying in too early. However, the investment market is very different this time.
The economy is relatively strong with low unemployment and more importantly vacancy rates are low and there is not the over supply experienced in previous property booms. This means that as long as occupancy rates stay high then the income generating attractions of this asset class are strong.
So where next for income generating property stocks in 2008?
First of all. The credit crunch is biting. It's slowing investment. Economies such as the UK's which has been buoyed by consumer spending financed by cheap credit will slow in 2008. The Government and the Bank of England fearing a collapse in the housing market which would cause a melt down in the UK economy are likely to cut interest rates aggressively The Sunday Times has predicted that this could be done 4 times next year which would put the base rate at 4.5%. Falling interest rates suddenly stop making the returns on cash deposits look quite attractive. Suddenly the 8% plus income generated by some of the property stocks and share i have looked at start to look very attractive indeed, particularly when viewed against the already heavy discounts to asset values. Have a look at my previous article for some specific income generating property stocks to buy.
Appearance of property vulture funds in 08
I would expect to see in 08 the appearance of property vulture funds that are set up probably by hedge funds to fund the acquisition of property companies that are undervalued and/ or are having temporary funding problems because of the credit crunch. One likely victim would be Invesco Property Income Trust
Correction in property shares overdone
I am not alone in my view that the correction in property shares has been overdone. Anthony Bolton the widely respected fund manager was reported in the FT has started to buy property stocks, reportedly telling his special situations trust that there are discrepancies in valuations.
INCOME MONKEY VERDICT
I'm keeping the faith that i have expressed all along that there are some real income generating bargains amongst property shares if investors take a cautious and steady approach to buying. They should look to buy on weakness and average down where necessary. This is the approach i will continue to take into 2008. I'm confident that as the credit crunch unwinds, the economy cools and interest rates have fallen my investments in income generating property stocks will show a rebound in their capital value, a strong and growing dividend yield and look a damn sight more stable & attractive proposition than most other investments.
THE INCOME MONKEY WOULD LIKE TO EXPRESS ITS THANKS TO INTERACTIVE INVESTOR WHOS INFORMATION HAS BEING VITAL IN PUTTING TOGETHER THIS BLOG. I WOULD ALSO POINT OUT THAT THE INCOME MONKEY HAS NO ASSOCIATION WITH THIS WEBSITE.
Thursday, 6 December 2007
DDs for dividends
Firstly, for all those income investors who have got fed up with the volatility haunting the share prices of many of the income generating property stocks that i have featured so far. Words of comfort from a Mr Warren Buffet, who by all accounts has done quite well at investing in his time.
There are certainly many fearful people out there when it comes to income generating stock & shares in property companies and this this may well represent a great buying opportunity. I think so and my portfolio reflects this.
Time for something completely different, just in case you thought all i invest in is property stocks & shares. Another sector that is very unloved at the moment is the media sector and particularly the newspaper industry. In many ways, its not surprising. With the internet fast being the medium of choice for many people to get their information and news and advertisers and readers migrating away from newspaper at an uncomfortable rate. Many investors perceive the newspapers industry as a sunset business. Well it is...............& it isn't.
Newspapers have realised that their days are numbered if they dont embrace technology and the internet. The result is that many have developed very strong websites and other related products that trade off the back of their traditional paper copy. One interesting high yielding income generating stock that appears to be doing very well at employing this strategy is Sport Media Group.
Most investors will not recognise this company but when i tell you that it owns the Daily & Sunday Sport you might be a little wiser. The company has been transformed over the last few months by acquiring Sport Newspapers Ltd on the 5th September. Prior to this the company was called Interative World Plc and was purely focused on digital content for the internet and mobile channels. It was effectively the digital arm of the Sport Newspaper with almost 50% of its' shares being owned by David Sullivan who was also owner of Sport Newspapers Ltd.
The deal enables the enlarged company - Sport Media Group - to exploit the growing relationship between print and digital media.
Andrew Fickling, managing director of both the Daily and Sunday Sport, said a strengthened relationship with Interactive was a "natural choice", enabling the group to grow in the online and mobile content markets and "greatly improve" its offering to readers.
Sport Newspapers was set up in 1986 by Sullivan and David and Ralph Gold, owners of the high street sex shop chain Ann Summers, who both hold 25 per cent stakes in the company.
Its titles have suffered from falling circulation over the last few years, which the firm believes comes from a lack of solid editorial. Its titles currently represent around 1.6 per cent of the "red top" tabloid market.
Sport Newspapers reported pre-tax profits of £2.8m for the nine months to May 31 on turnover of £19.6m. Interactive World posted pre-tax profits of £4.3m in the year to 31 July, 2006. It has 11 staff.
INCOME MONKEY VERDICT
The less than 'traditional' nature of this company has put many investors off. Consequently, the shares are trading at a year low of 63.5p valuing the business at less than £25 million although it is expected to turnover almost £43 million next year and generate over £12 million in profit. This put the shares on a projected P/E of 7.6 with earning per share of over 8p. This makes the continuation of the 7p dividend entirely possible putting the shares on a forward looking yield of over 11%. Income Monkey is particularly heartened by the statement of the Chairmam Simon-Hume Kendall published on the 6th of November in which he stated:
I'm just hoping with all those double Ds knocking about that they are symbolic of a future double digit dividend!
THE INCOME MONKEY WOULD LIKE TO EXPRESS ITS THANKS TO INTERACTIVE INVESTOR WHOS INFORMATION HAS BEING VITAL IN PUTTING TOGETHER THIS BLOG. I WOULD ALSO POINT OUT THAT THE INCOME MONKEY HAS NO ASSOCIATION WITH THIS WEBSITE.
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
There are certainly many fearful people out there when it comes to income generating stock & shares in property companies and this this may well represent a great buying opportunity. I think so and my portfolio reflects this.
Time for something completely different, just in case you thought all i invest in is property stocks & shares. Another sector that is very unloved at the moment is the media sector and particularly the newspaper industry. In many ways, its not surprising. With the internet fast being the medium of choice for many people to get their information and news and advertisers and readers migrating away from newspaper at an uncomfortable rate. Many investors perceive the newspapers industry as a sunset business. Well it is...............& it isn't.
Newspapers have realised that their days are numbered if they dont embrace technology and the internet. The result is that many have developed very strong websites and other related products that trade off the back of their traditional paper copy. One interesting high yielding income generating stock that appears to be doing very well at employing this strategy is Sport Media Group.
Most investors will not recognise this company but when i tell you that it owns the Daily & Sunday Sport you might be a little wiser. The company has been transformed over the last few months by acquiring Sport Newspapers Ltd on the 5th September. Prior to this the company was called Interative World Plc and was purely focused on digital content for the internet and mobile channels. It was effectively the digital arm of the Sport Newspaper with almost 50% of its' shares being owned by David Sullivan who was also owner of Sport Newspapers Ltd.
The deal enables the enlarged company - Sport Media Group - to exploit the growing relationship between print and digital media.
Andrew Fickling, managing director of both the Daily and Sunday Sport, said a strengthened relationship with Interactive was a "natural choice", enabling the group to grow in the online and mobile content markets and "greatly improve" its offering to readers.
Sport Newspapers was set up in 1986 by Sullivan and David and Ralph Gold, owners of the high street sex shop chain Ann Summers, who both hold 25 per cent stakes in the company.
Its titles have suffered from falling circulation over the last few years, which the firm believes comes from a lack of solid editorial. Its titles currently represent around 1.6 per cent of the "red top" tabloid market.
Sport Newspapers reported pre-tax profits of £2.8m for the nine months to May 31 on turnover of £19.6m. Interactive World posted pre-tax profits of £4.3m in the year to 31 July, 2006. It has 11 staff.
INCOME MONKEY VERDICT
The less than 'traditional' nature of this company has put many investors off. Consequently, the shares are trading at a year low of 63.5p valuing the business at less than £25 million although it is expected to turnover almost £43 million next year and generate over £12 million in profit. This put the shares on a projected P/E of 7.6 with earning per share of over 8p. This makes the continuation of the 7p dividend entirely possible putting the shares on a forward looking yield of over 11%. Income Monkey is particularly heartened by the statement of the Chairmam Simon-Hume Kendall published on the 6th of November in which he stated:
"The dividend reflects the strong cash generative nature of the Company and, given the low working capital needs of the business, the Board intends to maintain a progressive policy."
I'm just hoping with all those double Ds knocking about that they are symbolic of a future double digit dividend!
THE INCOME MONKEY WOULD LIKE TO EXPRESS ITS THANKS TO INTERACTIVE INVESTOR WHOS INFORMATION HAS BEING VITAL IN PUTTING TOGETHER THIS BLOG. I WOULD ALSO POINT OUT THAT THE INCOME MONKEY HAS NO ASSOCIATION WITH THIS WEBSITE.
Monday, 3 December 2007
Investment income gem
Some people have asked me where do i find my income stocks.
Well quite often i just come across them by chance whilst checking on the performance of my portfolio. The next share is a classic case. I was looking at one of my favourite share information sites www.digitallook.com when i noticed the name of a company. The Small Company Dividend Trust. As someone who is always seeking new income generating opportunities I immediately thought this share was worth further investigation; particularly as one of the shareholders had just shelled out near £30,000 on over doubling his stake.
The company which invests in shares in high yielding shares on the UK market has the following investment policy
It is currently trading close to its year low at 163.75p and well short of its high of 241p. The company is small with a market cap of just over £26 million. However, its big attraction is its' yield. The company pays quarterly dividends which are projected to total 13.85p for the forthcoming year putting it on a income yield of almost 8.5%.
If income monkeys do decide to take the plunge, they will be some fairly distinguished company. One of the directors is no less than the former Chancellor of the Exchequer Norman now Lord Lamont of Lerwick who has taken the opportunity of the slump in the price to top up on his holding.
INCOME MONKEY VERDICT
For those income monkeys that want exposure to the UK stockmarket without the risks inherrent with investing in a single share or stock, this trust is an ideal way of benefiting from rising valuations whilst taking a tidy income into the bargain.
Well quite often i just come across them by chance whilst checking on the performance of my portfolio. The next share is a classic case. I was looking at one of my favourite share information sites www.digitallook.com when i noticed the name of a company. The Small Company Dividend Trust. As someone who is always seeking new income generating opportunities I immediately thought this share was worth further investigation; particularly as one of the shareholders had just shelled out near £30,000 on over doubling his stake.
The company which invests in shares in high yielding shares on the UK market has the following investment policy
The Company's funds will be invested principally in companies with a market capitalisation of up to £500 million; a maximum of 20 per cent. of the Company's portfolio may be invested in companies without reference to their market capitalisation at the discretion of the Investment Manager. The Company's portfolio will comprise companies listed on the Official List and companies admitted to trading on AIM. The Company will not invest in preference shares, loan stock or notes, convertible securities or fixed interest securities or any similar securities convertible into shares. The Company will not invest in other investment trusts or unquoted companies.
It is currently trading close to its year low at 163.75p and well short of its high of 241p. The company is small with a market cap of just over £26 million. However, its big attraction is its' yield. The company pays quarterly dividends which are projected to total 13.85p for the forthcoming year putting it on a income yield of almost 8.5%.
If income monkeys do decide to take the plunge, they will be some fairly distinguished company. One of the directors is no less than the former Chancellor of the Exchequer Norman now Lord Lamont of Lerwick who has taken the opportunity of the slump in the price to top up on his holding.
INCOME MONKEY VERDICT
For those income monkeys that want exposure to the UK stockmarket without the risks inherrent with investing in a single share or stock, this trust is an ideal way of benefiting from rising valuations whilst taking a tidy income into the bargain.
Sunday, 2 December 2007
Why to buy high yield property shares
Shares in property companies have taken a pounding to the extent that some are now paying a double digit yield. For some ideas of which income generating property shares have a look at previous posts.
The UK's economy is clearly going to hit the buffers in 08. Commercial property is overvalued probably in the order of 10-15% and this situation will unwind during the next year. However, the fundamentals of investing in property are still strong for income seeking investors. With discounts in some income generating property companies running at near 50% there is plenty of scope for a fall in the underlying value of their property assets and still for an income investor to buy property assets at a discount.
The good news for income seeking investors is that rental incomes on property is fairly secure and with no immediate signs of over supply that have characterised other property booms. Therefore whilst income investors are quite happy to take the 6% available on their building society accounts at the moment, income investors looking at this time next year may want to pay attention to HSBC's Chief Economist who warns that interest rates could fall to as low as 4.5% by the start of 09. This all means that the hefty 6%+ interest that depositors are obtaining now will be a thing of the past.
The same fate will not befall income generating property shares. In fact the opposite is likely to be the case, falling interest rates will be good for property companies cash flow meaning more cash to make dividend payments. Falling prices means rising yields for those companies who are still investing. This means that the net income from property is also on the rise.
Income investors should ride out the storm in the credit markets to secure a long-term rising income stream.
The UK's economy is clearly going to hit the buffers in 08. Commercial property is overvalued probably in the order of 10-15% and this situation will unwind during the next year. However, the fundamentals of investing in property are still strong for income seeking investors. With discounts in some income generating property companies running at near 50% there is plenty of scope for a fall in the underlying value of their property assets and still for an income investor to buy property assets at a discount.
The good news for income seeking investors is that rental incomes on property is fairly secure and with no immediate signs of over supply that have characterised other property booms. Therefore whilst income investors are quite happy to take the 6% available on their building society accounts at the moment, income investors looking at this time next year may want to pay attention to HSBC's Chief Economist who warns that interest rates could fall to as low as 4.5% by the start of 09. This all means that the hefty 6%+ interest that depositors are obtaining now will be a thing of the past.
The same fate will not befall income generating property shares. In fact the opposite is likely to be the case, falling interest rates will be good for property companies cash flow meaning more cash to make dividend payments. Falling prices means rising yields for those companies who are still investing. This means that the net income from property is also on the rise.
Income investors should ride out the storm in the credit markets to secure a long-term rising income stream.
Tuesday, 27 November 2007
mapeley capitulation
For those income investors who have been following Mapeley shares its been a traumatic ride over the last few months. Even when a share is good value by any common sense measure it is frustrating when the markets have a downer on it and there is nothing an individual investor can do but hang on for the ride.
Today just after 12 the market sentiment finally changed. If income investors want to study the intraday graph for the 27th november they can see that during the morning the share price after an initial recovery resumed its inexerable journey south. that was until it hit £12.20 just after mid day. At this point the share rocketed upwards to over £13 and then recouvered further to end just a couple of pence down on the day at £13.32. This to me signals a strong point of resistance. I cant see this income share going below £12 and income investors should look for this share to find a trading range between £12.75 and £13.50 before starting a slow recovery
Today just after 12 the market sentiment finally changed. If income investors want to study the intraday graph for the 27th november they can see that during the morning the share price after an initial recovery resumed its inexerable journey south. that was until it hit £12.20 just after mid day. At this point the share rocketed upwards to over £13 and then recouvered further to end just a couple of pence down on the day at £13.32. This to me signals a strong point of resistance. I cant see this income share going below £12 and income investors should look for this share to find a trading range between £12.75 and £13.50 before starting a slow recovery
Sunday, 25 November 2007
3 income property stocks to buy
I've already warned income investors of income generating property stocks that may proove to be fools gold.
So what should income orientated investors buy?
Here are three stock that income monkeys could look at and should provide a handsome income and a solid investment.
Close High Income Properties
This UK specialist investment company was set up by Close Brothers Bank bank in 2003 with an offer of 50 million shares priced at £1. The portfolio comprises of industrial property which is not as sexy as some of the sectors such as retail and offices. However, the good news for Income Monkeys is that as anybody that yields on industrial property are higher than other sectors meaning that a portfolio of industrial property can return much higher incomes.
The current dividend is 8.5p which on the mid price for the stock gives a yield of 11.5%. Unsustainable you might say. Well no. Careful inspection of the latest interim report published on 25th September reveals in the consolidated income statement that the company generated net cash of just over £5.5 million before financing. Interest payments and other finance charges accounted for just over £2.8 million leaving approximately £2.7 million in free cash to fund dividends. The costs of funding a dividend of 4.25p for the half year on the 77 million shares in issue come to about £3.3 million. Therefore the dividend is not quite covered but with a little bit of financial engineering or cutting of fees it should be sustainable. Investors may be also comforted by the Chairmans statement in the Interim Report released in September reiterating the dividend target of 8.5p.
The latest net asset value revealed NAV of just under 120p which means that it is currently trading at a 38% discount to its underlying share price of 74p. The downside with this share is the ridiculous spread between the buying and selling price which is over 10% meaning its not a share for short term speculation.
Dawnay Day Trevaria
For income monkeys looking at avoiding the down turn in the Uk commercial property market. They should consider Dawnay Day Trevaria. This company is focused on investing in income generating German retail property. Launced in December 2005 the company has now completed its objective of having a portfolio of euro 2.3 billion. The company's share price has been hit by the down turn in sentiment towards property assets.
The projected dividend for this year is 4.59 cents rising to 5.87 cents in 2008 equating to a 7.2% yield on its current share price of 81 cents. These levels of dividend are easily affordable from its rent roll of 59,319,000 euros for the 6 months ended 30 june 07. After expenses and interest net revenue should be approximately 42 million euros for the year before tax. This is enough free cash to pay up to a 6.6 cent annual dividend. The company's share price is easily covered by its' net assets. It had a NAV of 116c back in june which means the property income stock is now trading at over a 30% discount to its current share price. Too high for a company investing in a property market that has not seen the excessive over valuations experienced in the UK & therefore is on a much firmer footing.
Mapeley
For investors not spooked by a slightly different business model should consider Mapeley. This company is not only a property investment company but is an outsourcing business which means that it has long-term contracts with large organisations to look after all their property & accommodation requirements. This means that not only do they receive rent from their tenants they also earn regular fixed fees for taking on this role.
Mapeley's share price has slumped from a high of just over £40 early this year to a low of £13.20 last week. Currently the shares are trading at a little over £14. This puts them on a massive yield of over 13% forecast to rise to 13.8% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With latest net assets of £22.78 per share according to the 3rd quater results published in November. The current market capitalisation now values the company at £421 million putting them on a discount to net assets of 37%.
The most important thing is cashflow. The consolidated income statement reveals that net revenue was a little under £100 million for the nine months ended 30 September 07. If admin expenses of £14.5 million and then net finance costs of £59.3 are taken off this leads net cashflow of £26.8 million. This is somewhat short of the £41.4 million needed to fund the expected dividend payment and therefore casts doubts on its' long-term sustainability. However, it still leaves just under £36 million free cashflow annually for income investors or £1.21 per share. This still equates to a very healthy 8.7% yield on a share price of £14 and their is always the chance that the company holds to dividend in anticipation of rising rental incomes.
INCOME MONKEY VERDICT
Income investors should read the previous post about fools gold. A little careful digging through the consolidated cashflow statements of these property companies has revealed some real income gems. Don't forget to come back to read about more income investing opportunities in coming weeks.
So what should income orientated investors buy?
Here are three stock that income monkeys could look at and should provide a handsome income and a solid investment.
Close High Income Properties
This UK specialist investment company was set up by Close Brothers Bank bank in 2003 with an offer of 50 million shares priced at £1. The portfolio comprises of industrial property which is not as sexy as some of the sectors such as retail and offices. However, the good news for Income Monkeys is that as anybody that yields on industrial property are higher than other sectors meaning that a portfolio of industrial property can return much higher incomes.
The current dividend is 8.5p which on the mid price for the stock gives a yield of 11.5%. Unsustainable you might say. Well no. Careful inspection of the latest interim report published on 25th September reveals in the consolidated income statement that the company generated net cash of just over £5.5 million before financing. Interest payments and other finance charges accounted for just over £2.8 million leaving approximately £2.7 million in free cash to fund dividends. The costs of funding a dividend of 4.25p for the half year on the 77 million shares in issue come to about £3.3 million. Therefore the dividend is not quite covered but with a little bit of financial engineering or cutting of fees it should be sustainable. Investors may be also comforted by the Chairmans statement in the Interim Report released in September reiterating the dividend target of 8.5p.
The latest net asset value revealed NAV of just under 120p which means that it is currently trading at a 38% discount to its underlying share price of 74p. The downside with this share is the ridiculous spread between the buying and selling price which is over 10% meaning its not a share for short term speculation.
Dawnay Day Trevaria
For income monkeys looking at avoiding the down turn in the Uk commercial property market. They should consider Dawnay Day Trevaria. This company is focused on investing in income generating German retail property. Launced in December 2005 the company has now completed its objective of having a portfolio of euro 2.3 billion. The company's share price has been hit by the down turn in sentiment towards property assets.
The projected dividend for this year is 4.59 cents rising to 5.87 cents in 2008 equating to a 7.2% yield on its current share price of 81 cents. These levels of dividend are easily affordable from its rent roll of 59,319,000 euros for the 6 months ended 30 june 07. After expenses and interest net revenue should be approximately 42 million euros for the year before tax. This is enough free cash to pay up to a 6.6 cent annual dividend. The company's share price is easily covered by its' net assets. It had a NAV of 116c back in june which means the property income stock is now trading at over a 30% discount to its current share price. Too high for a company investing in a property market that has not seen the excessive over valuations experienced in the UK & therefore is on a much firmer footing.
Mapeley
For investors not spooked by a slightly different business model should consider Mapeley. This company is not only a property investment company but is an outsourcing business which means that it has long-term contracts with large organisations to look after all their property & accommodation requirements. This means that not only do they receive rent from their tenants they also earn regular fixed fees for taking on this role.
Mapeley's share price has slumped from a high of just over £40 early this year to a low of £13.20 last week. Currently the shares are trading at a little over £14. This puts them on a massive yield of over 13% forecast to rise to 13.8% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With latest net assets of £22.78 per share according to the 3rd quater results published in November. The current market capitalisation now values the company at £421 million putting them on a discount to net assets of 37%.
The most important thing is cashflow. The consolidated income statement reveals that net revenue was a little under £100 million for the nine months ended 30 September 07. If admin expenses of £14.5 million and then net finance costs of £59.3 are taken off this leads net cashflow of £26.8 million. This is somewhat short of the £41.4 million needed to fund the expected dividend payment and therefore casts doubts on its' long-term sustainability. However, it still leaves just under £36 million free cashflow annually for income investors or £1.21 per share. This still equates to a very healthy 8.7% yield on a share price of £14 and their is always the chance that the company holds to dividend in anticipation of rising rental incomes.
INCOME MONKEY VERDICT
Income investors should read the previous post about fools gold. A little careful digging through the consolidated cashflow statements of these property companies has revealed some real income gems. Don't forget to come back to read about more income investing opportunities in coming weeks.
Monday, 19 November 2007
Income investors beware of fools gold
Its been a rocky old week for income investors and particularly for anyone that has invested in income generating property stocks.
The markets continued to fall during the early part of the week but towards the end the bargain hunters were in evidence.
Fools Gold
What income investors have got to guard against when looking for income generating property stocks are headline grabbing yields. For instance a stock such as Invesco Property Income Trust. This fund launced in September 2004 on its current share price of 44.75p gives it a valuation of £68.5 million and a prospective yield assuming its implied annual dividend of 6.8p of an incredible 15%. The shares are also trading at a discount to its most recent asset valuation to the end of September of 114p of 60%. Too good to be true. Well yes.
If an income monkey cares to look a little closer at the last published accounts for the half year to the end of September 2007 they should immediately go to the consolidated income statement. This revealed that income from rental & service charges was £14,761,000. Expenses were £6,382,000 before finance costs i.e. interest payments. When tax and finance costs are added to expenses net income actually comes out at £1,448,000. Clearly the company is viable and can service its expenses. However, with 153 million shares in issue the dividend of 6.8p costs just under £4.6m for the half year; considerably more than the free cashflow of just under £1.5m. This is clearly unsustainable without the company making substantial gains on the asset value of it's underlying portfolio and then refinancing or selling and using the funds to bolster the dividend fund.
With prices in commercial property set to fall by as much as 15% next year a forced sale would not be a good option and with the credit crunch impacting on credit availability then refinancing is not likely to be a viable option, particularly when the company recently came clean that they were close to breaching their lending covenants.
INCOME MONKEY VERDICT
It look inevitable that the company will have to cut its dividend in 2008. Therefore this stock is not one for the income seeking investor. However, it might represent an opportunity for investors who feel that at 60% discount to underlying assets that this company is oversold and once it's short term difficulties are overcome this viable company's real value will start to be reflected in a recovering share price.
COMING SOON 3 INCOME GENERATING PROPERTY STOCKS TO BUY
For investors looking at advice on how to invest directly in buy-to-let property have a look at property hawk. The UKs number 1 site for UK buy-to-let.
The markets continued to fall during the early part of the week but towards the end the bargain hunters were in evidence.
Fools Gold
What income investors have got to guard against when looking for income generating property stocks are headline grabbing yields. For instance a stock such as Invesco Property Income Trust. This fund launced in September 2004 on its current share price of 44.75p gives it a valuation of £68.5 million and a prospective yield assuming its implied annual dividend of 6.8p of an incredible 15%. The shares are also trading at a discount to its most recent asset valuation to the end of September of 114p of 60%. Too good to be true. Well yes.
If an income monkey cares to look a little closer at the last published accounts for the half year to the end of September 2007 they should immediately go to the consolidated income statement. This revealed that income from rental & service charges was £14,761,000. Expenses were £6,382,000 before finance costs i.e. interest payments. When tax and finance costs are added to expenses net income actually comes out at £1,448,000. Clearly the company is viable and can service its expenses. However, with 153 million shares in issue the dividend of 6.8p costs just under £4.6m for the half year; considerably more than the free cashflow of just under £1.5m. This is clearly unsustainable without the company making substantial gains on the asset value of it's underlying portfolio and then refinancing or selling and using the funds to bolster the dividend fund.
With prices in commercial property set to fall by as much as 15% next year a forced sale would not be a good option and with the credit crunch impacting on credit availability then refinancing is not likely to be a viable option, particularly when the company recently came clean that they were close to breaching their lending covenants.
INCOME MONKEY VERDICT
It look inevitable that the company will have to cut its dividend in 2008. Therefore this stock is not one for the income seeking investor. However, it might represent an opportunity for investors who feel that at 60% discount to underlying assets that this company is oversold and once it's short term difficulties are overcome this viable company's real value will start to be reflected in a recovering share price.
COMING SOON 3 INCOME GENERATING PROPERTY STOCKS TO BUY
For investors looking at advice on how to invest directly in buy-to-let property have a look at property hawk. The UKs number 1 site for UK buy-to-let.
Saturday, 17 November 2007
Capitulation from retail property investors
This week has seen some more dramatic falls in the valuation of property investment companies. Particularly those with a substantial holding in UK property as fear of a slump in values escalate.
Retail investors naive
The irony is that many of the retail investors who are dumping these stocks were the ones who have been buying enthusiastically over the last 12 months, urged on by 'back ground chatter' from the media that property is always a good investment.
Investment companies spotted early on the sales opportunity of riding the property investment wave by launching their own property investment funds. When retail investors bought these funds often on the back of advice from their financial advisor, these funds were already overvalued with retail investors buying into these investment funds at a tiny discount or even a premium to their net asset value and yielding for the investor saver a paltry single digit dividend income of say 3-4%. These valuations all assumed a continued high rate of capital growth which was clearly unsustainable in an already over heated market.
Retail investors reach capitulation point
Sadly these same investors are now selling up as their confidence in these property investment funds and their nerve of loosing more money finally breaks. A capitulation point is rapidly being reached for the share price of many property investment companies as the last of their retail investors finally bail out.
Buying opportunity
The thing is this is just the point when retail investors should be buying more. At these prices a retail saver and investor is buying typically a company trading at 40%+ to its underlying assets. Whats more for an income monkey is that they are yielding near or above 10%. Investors should realise that income yields on property shares are different to normal companies. Very rarely do rents fall, which is the companies primary income stream. Their main cost is servicing their debt so increases in interest rates can be a factor although many of the companies have taken steps to fix these rates. Therefore, incomes are relatively secure irrespective of what happens in the short term to asset values. Asset values will inevitably recover and grow in the longer term.
Property share good bet
Shares in commercial property companies remain a good bet. Why? The main risks to the global economy are an economic slowdown and inflation. I take the first scenario. An economic slowdown will result in a lowering of interest rates. Lower interests reduces a property companies costs and means that they have a higher margin and more revenue with which to pay out in dividend. It also means that a high dividend is more attractive to investors unable to get as high a return through interest paid on cash deposits. Secondly inflation is a debtors friend, as it devalues the real value of a debt. What are property investment companies other than a business that uses their property assets to generate income to pay off their debt. Therefore higher inflation is beneficial to these companies as the values of their debts fall in relation to their assets values and rental values over time.
What shares to buy
For investors and savers interested in the pick of the best high yielding property stocks. COMING SOON my report on the 5 hottest high yielding property stocks to buy.
Retail investors naive
The irony is that many of the retail investors who are dumping these stocks were the ones who have been buying enthusiastically over the last 12 months, urged on by 'back ground chatter' from the media that property is always a good investment.
Investment companies spotted early on the sales opportunity of riding the property investment wave by launching their own property investment funds. When retail investors bought these funds often on the back of advice from their financial advisor, these funds were already overvalued with retail investors buying into these investment funds at a tiny discount or even a premium to their net asset value and yielding for the investor saver a paltry single digit dividend income of say 3-4%. These valuations all assumed a continued high rate of capital growth which was clearly unsustainable in an already over heated market.
Retail investors reach capitulation point
Sadly these same investors are now selling up as their confidence in these property investment funds and their nerve of loosing more money finally breaks. A capitulation point is rapidly being reached for the share price of many property investment companies as the last of their retail investors finally bail out.
Buying opportunity
The thing is this is just the point when retail investors should be buying more. At these prices a retail saver and investor is buying typically a company trading at 40%+ to its underlying assets. Whats more for an income monkey is that they are yielding near or above 10%. Investors should realise that income yields on property shares are different to normal companies. Very rarely do rents fall, which is the companies primary income stream. Their main cost is servicing their debt so increases in interest rates can be a factor although many of the companies have taken steps to fix these rates. Therefore, incomes are relatively secure irrespective of what happens in the short term to asset values. Asset values will inevitably recover and grow in the longer term.
Property share good bet
Shares in commercial property companies remain a good bet. Why? The main risks to the global economy are an economic slowdown and inflation. I take the first scenario. An economic slowdown will result in a lowering of interest rates. Lower interests reduces a property companies costs and means that they have a higher margin and more revenue with which to pay out in dividend. It also means that a high dividend is more attractive to investors unable to get as high a return through interest paid on cash deposits. Secondly inflation is a debtors friend, as it devalues the real value of a debt. What are property investment companies other than a business that uses their property assets to generate income to pay off their debt. Therefore higher inflation is beneficial to these companies as the values of their debts fall in relation to their assets values and rental values over time.
What shares to buy
For investors and savers interested in the pick of the best high yielding property stocks. COMING SOON my report on the 5 hottest high yielding property stocks to buy.
Tuesday, 13 November 2007
Building an income stream
On the day that RICS announced a further deterioration in the housing market in the UK with the fastest decline in the sentiment of its members since July 2005 it would seem strange for me to turn my attention to house builders.
However, investors and savers that are familiar with my style will know that i love nothing better than a good counter intuitive play.
So the housing market is slowing down. At long last many would say. "Will it crash?". Probably not unless the wider UK economy hits the buffers. Highly unlikely with all the young immigrants that are entering our economy, working hard for very little and spending! I digress.
The fact is share prices in house builders have been savaged since the beginning of the year as firstly the slowdown and the sub-prime crisis has rocked confidence in property markets in the US and now here in the UK.
The result is that many of the major UK house builders share prices are trading at less than 50% that they were at earlier in the year. I look below at several that particularly appeal to me and might be attractive to other investors and savers.
Barrat Developments
This household name synonymous with mass suburban estates was transformed by the recent take over of Wilson Bowden into the UKs largest house builder. It now has over 5 years land supply and just under 110,000 plots of land. Recent figures for the year ending June 07 were strong. Showing earnings and dividends up although profit margins fell from 17% to 16.7%.
The main interest for the income investor is the substantial dividend. The projected dividend of just under 39p for 08 equates to about 7.5%. On a P/E of under 5 and with a projected dividend cover of just below 3 this dividend looks very safe in the short/medium term.
HIGH 1296 LOW 514 CURRENT 515
PROJECTED YIELD 7.6%
Taylor Wimpey
This builder has a number of recognised UK brands including George Wimpey, Laing and Bryant. It also has interests in the US and Spain. It now claims to be the UKs largest house builder. The latest trading statement at the end of October warned of deterioration's in the US and Spain although it was positive about the integration of its two merged UK businesses of Taylor Woodrow and George Wimpey.
On current projection to the end of the year. The shares have now gone ex-dividend but on next years forecast earnings of over £500m they are projected to pay about a 17p dividend more than twice covered by income and equating to a mouth watering 8.3% yield.
HIGH 518.5 LOW 201.5 CURRENT 205.75
PROJECTED YIELD (08) 8.3%
Others
Other house builders investors and savers could look at are: Bovis with a projected yield of 6.5% for next year and Persimmon on a prospective yield for next year of 6.6%.
INCOME MONKEY VERDICT
The market is clearly right to worry about a slowdown in the housing market impacting on house builders profits. However, we think the sell off is over done. Gordon Brown wants 3 million new homes built by 2010. Who do you think is going to build them - the Government? Not on your life. The only people to do this are the big house builders who incidentally control most of the development land. The fact is the builders only build when they can make a decent profit and if they don't build supply of housing remains even tighter forcing up house prices until they do make an acceptable margin. The house builders control the new build market & the government cant or haven't the political guts to do anything about it so buy for dividend now before the rest of the lemmings realise they have made a mistake by selling too cheaply.
However, investors and savers that are familiar with my style will know that i love nothing better than a good counter intuitive play.
So the housing market is slowing down. At long last many would say. "Will it crash?". Probably not unless the wider UK economy hits the buffers. Highly unlikely with all the young immigrants that are entering our economy, working hard for very little and spending! I digress.
The fact is share prices in house builders have been savaged since the beginning of the year as firstly the slowdown and the sub-prime crisis has rocked confidence in property markets in the US and now here in the UK.
The result is that many of the major UK house builders share prices are trading at less than 50% that they were at earlier in the year. I look below at several that particularly appeal to me and might be attractive to other investors and savers.
Barrat Developments
This household name synonymous with mass suburban estates was transformed by the recent take over of Wilson Bowden into the UKs largest house builder. It now has over 5 years land supply and just under 110,000 plots of land. Recent figures for the year ending June 07 were strong. Showing earnings and dividends up although profit margins fell from 17% to 16.7%.
The main interest for the income investor is the substantial dividend. The projected dividend of just under 39p for 08 equates to about 7.5%. On a P/E of under 5 and with a projected dividend cover of just below 3 this dividend looks very safe in the short/medium term.
HIGH 1296 LOW 514 CURRENT 515
PROJECTED YIELD 7.6%
Taylor Wimpey
This builder has a number of recognised UK brands including George Wimpey, Laing and Bryant. It also has interests in the US and Spain. It now claims to be the UKs largest house builder. The latest trading statement at the end of October warned of deterioration's in the US and Spain although it was positive about the integration of its two merged UK businesses of Taylor Woodrow and George Wimpey.
On current projection to the end of the year. The shares have now gone ex-dividend but on next years forecast earnings of over £500m they are projected to pay about a 17p dividend more than twice covered by income and equating to a mouth watering 8.3% yield.
HIGH 518.5 LOW 201.5 CURRENT 205.75
PROJECTED YIELD (08) 8.3%
Others
Other house builders investors and savers could look at are: Bovis with a projected yield of 6.5% for next year and Persimmon on a prospective yield for next year of 6.6%.
INCOME MONKEY VERDICT
The market is clearly right to worry about a slowdown in the housing market impacting on house builders profits. However, we think the sell off is over done. Gordon Brown wants 3 million new homes built by 2010. Who do you think is going to build them - the Government? Not on your life. The only people to do this are the big house builders who incidentally control most of the development land. The fact is the builders only build when they can make a decent profit and if they don't build supply of housing remains even tighter forcing up house prices until they do make an acceptable margin. The house builders control the new build market & the government cant or haven't the political guts to do anything about it so buy for dividend now before the rest of the lemmings realise they have made a mistake by selling too cheaply.
Monday, 5 November 2007
Banking on income
There is nothing like a crisis as a way of shaking out a few good income generating investments.
One such crisis which has gathered steam in the last few months is the sub-prime loans debacle that started in the US and has spread around the worlds financial markets like a contagion leading to the so called credit crunch. The credit crunch being effectively where banks and wholesale markets have reduced their lending to each other on the basis they were not sure how many dodgy loans that might have and therefore how much of their own capital they might need to sure up their own finances. At the same time it also cast doubt on the quality of the assets backing of the institutions that they are lending to making it difficult to measure and price risk. The cost of risk to any lender is reflected in the interest rate a lender charges.
The latest victim of this debacle has been Chuck Prince. He quit as chairman and chief executive of Citigroup on Sunday night as the company revealed it was facing between $8bn and $11bn of further losses on its holdings of mortgage-related securities.
All this is helping to drive down the values of bank stocks in the UK and US as the markets worry about the size of the potential write offs and the exposure of banks to these bad loans. All this I believe is throwing up some very good income and saving generating opportunities.
Some of the most heavily sold banking stocks have been UK domestic banks. These banks are particularly exposed to the UK housing market and any slowdown in consumer spending with the UK market. Two stocks that spring to mind are: Bradford & Bingley and Alliance and Leicester. Another stock that has been particularly heavily hit is Barclays because of concerns over Barclays Capital (a subsidiary) potential exposure to the sub-prime market.
Bradford & Bingley
Bradford and Bingley is probably the most exposed of the UK banks to a down turn in the UK housing market being the owner of Mortgage Express the UK’s largest buy-to-let lender and also having targeted aggressively the self certification mortgage market. Both these areas are very vulnerable to a slowdown in the UK housing market.
The shares are currently down from a high of 481.75p and trading at just over half this figure which is near their historic lows. The good news for income monkeys is the dividend which is projected to be just below 8% for the year end December 07 and is covered by just under two times by projected earnings.
High 481.75p Low 254p CURRENT 272p
Projected Yield 7.7%
Barclays
Barclays is one of the most established and well known names in UK retail banking. It is a massive global bank with an asset value of over £30 billion. Its share price is currently trading off its low for the year of just under £5 although it is still some way off its low point during this decade when in early 2003 it was just over £3. The broad spread of its businesses and its size means that it should be well insulated against any down turn and its projected yield of 6.3% is over twice covered for the year ending Dec 07. It is also forecast to increase to 7% for 2008 on a P/E of 7.2.
High 790p Low 498.25p CURRENT 521.5p
Projected yield 6.3%
Alliance and Leicester
Alliance & Leicester is another of the smaller retail banks which was created from the demutualisation of building societies that occurred in the late 80s & early 90s. Being smaller than international banks such as Barclays and being UK focused it is very susceptible to a down turn in the UK economy. However, unlike banks such as Bradford & Bingley and Northern Rock it has not entered so aggressively into providing mortgages and maintains instead a mix of business and retail operations. Projected dividend cover is less than the other two stocks at 1.7 earnings.
High 1197p Low 600p CURRENT 701.5p
Projected yield 7.8%
The Income Monkey Verdict
For those investors and savers with a strong nerve these banks could prove to be a solid income stream. There is no doubt that the market in its current nervous state will continued to be spooked by any new revelations about financial imprudence in the lending markets. However, remember it is the banks we are dealing with. Bankers have a very clever way of being able to get themselves out of hole when problems occur, so that it is always somebody else that is left with the loss. Look how the Bank of England is paying to save Northern Rock for instance. If the property market goes 'tits up' again it will be the borrowers who have to bite the bullet. The nature of bankers are that they ensure that others are the ones that are exposed to the really big risks.
Therefore bank incomes should be reasonably secure with dividends covered comfortably by profits. Markets will have to get much much worse for investors and savers to worry about not getting paid. Income Monkeys should bank on income & continue to buy on weakness.
One such crisis which has gathered steam in the last few months is the sub-prime loans debacle that started in the US and has spread around the worlds financial markets like a contagion leading to the so called credit crunch. The credit crunch being effectively where banks and wholesale markets have reduced their lending to each other on the basis they were not sure how many dodgy loans that might have and therefore how much of their own capital they might need to sure up their own finances. At the same time it also cast doubt on the quality of the assets backing of the institutions that they are lending to making it difficult to measure and price risk. The cost of risk to any lender is reflected in the interest rate a lender charges.
The latest victim of this debacle has been Chuck Prince. He quit as chairman and chief executive of Citigroup on Sunday night as the company revealed it was facing between $8bn and $11bn of further losses on its holdings of mortgage-related securities.
All this is helping to drive down the values of bank stocks in the UK and US as the markets worry about the size of the potential write offs and the exposure of banks to these bad loans. All this I believe is throwing up some very good income and saving generating opportunities.
Some of the most heavily sold banking stocks have been UK domestic banks. These banks are particularly exposed to the UK housing market and any slowdown in consumer spending with the UK market. Two stocks that spring to mind are: Bradford & Bingley and Alliance and Leicester. Another stock that has been particularly heavily hit is Barclays because of concerns over Barclays Capital (a subsidiary) potential exposure to the sub-prime market.
Bradford & Bingley
Bradford and Bingley is probably the most exposed of the UK banks to a down turn in the UK housing market being the owner of Mortgage Express the UK’s largest buy-to-let lender and also having targeted aggressively the self certification mortgage market. Both these areas are very vulnerable to a slowdown in the UK housing market.
The shares are currently down from a high of 481.75p and trading at just over half this figure which is near their historic lows. The good news for income monkeys is the dividend which is projected to be just below 8% for the year end December 07 and is covered by just under two times by projected earnings.
High 481.75p Low 254p CURRENT 272p
Projected Yield 7.7%
Barclays
Barclays is one of the most established and well known names in UK retail banking. It is a massive global bank with an asset value of over £30 billion. Its share price is currently trading off its low for the year of just under £5 although it is still some way off its low point during this decade when in early 2003 it was just over £3. The broad spread of its businesses and its size means that it should be well insulated against any down turn and its projected yield of 6.3% is over twice covered for the year ending Dec 07. It is also forecast to increase to 7% for 2008 on a P/E of 7.2.
High 790p Low 498.25p CURRENT 521.5p
Projected yield 6.3%
Alliance and Leicester
Alliance & Leicester is another of the smaller retail banks which was created from the demutualisation of building societies that occurred in the late 80s & early 90s. Being smaller than international banks such as Barclays and being UK focused it is very susceptible to a down turn in the UK economy. However, unlike banks such as Bradford & Bingley and Northern Rock it has not entered so aggressively into providing mortgages and maintains instead a mix of business and retail operations. Projected dividend cover is less than the other two stocks at 1.7 earnings.
High 1197p Low 600p CURRENT 701.5p
Projected yield 7.8%
The Income Monkey Verdict
For those investors and savers with a strong nerve these banks could prove to be a solid income stream. There is no doubt that the market in its current nervous state will continued to be spooked by any new revelations about financial imprudence in the lending markets. However, remember it is the banks we are dealing with. Bankers have a very clever way of being able to get themselves out of hole when problems occur, so that it is always somebody else that is left with the loss. Look how the Bank of England is paying to save Northern Rock for instance. If the property market goes 'tits up' again it will be the borrowers who have to bite the bullet. The nature of bankers are that they ensure that others are the ones that are exposed to the really big risks.
Therefore bank incomes should be reasonably secure with dividends covered comfortably by profits. Markets will have to get much much worse for investors and savers to worry about not getting paid. Income Monkeys should bank on income & continue to buy on weakness.
Friday, 26 October 2007
5 high yielding consumer stocks to buy
The UK stock market has marked down significantly a number of UK consumer stocks as concerns over the current levels of consumer spending in the UK economy have intensified. These matters were made worse as a result of the ‘credit crunch’ and subsequent worries over the potential for falling house prices to impact further on consumer confidence.
The current valuations of some retail stocks indicate a market consensus that British consumers are going to have to pull in their spending and the good time for these retailers is over for now.
The Income Monkey suggests that the current falls are over done. Investors and savers that are focused on maximising their investment income might want to take a punt on these income stocks and the fact that their sales are sufficiently sustained to allow these household names to maintain their high dividends even during the coming leaner times. What the market may have missed in several cases is that what are perceived as largely UK focused businesses are increasingly deriving their revenue from abroad and therefore are as much as a play on globalisation as they are on the health of the UK economy. Read on for some domestic income & savings opportunities.
DSG International
This company owns the brands Dixons, Currys and PC World. The market is concerned that its core markets of electricals and PCs will be hit hard by any slowdown in consumer spending. The share price has fallen from a high this year of 220p to just above its year low of 117p. The result is a healthy projected yield of just under 8%. The downside is that the dividend is only just covered by income and therefore if trading worsens more than expected there is always a danger that it could be cut.
High 220.25p Low 116.6p CURRENT 117p
Projected yield 7.7%
Debenhams
Since floating at 200p in 2006 Debenhams the UK’s second biggest department store has disappointed the market and had slumped to a low of just under 90p earlier this year. It has now bounced a little after an up beat trading statement in recent days which showed that despite like for like sales decline overall profits rose because of new store openings. The yield is not as healthy as some with a projection of 6.4% for the year ending august 08. However, the dividend income should be relatively safe giving it is covered just under twice by projected earnings.
High 203.75p Low 89.5p CURRENT 112.25P
Projected yield 6.4%
Pendragon
Pendragon is the UK’s biggest car dealer. The company used to specialise in luxury brands such as Porsche and Ferrari but has recently moved into selling main stream models by Ford and Vauxhall. The share price has slumped from a high of 125p earlier this year to trade at a little over half this level although it now stands above its low. Valued at a little over £400m with sales of £5 billion the yield for the financial year ending December 07 its’ yield is 6.2% rising to a projected 7.2% for 08.
High 125.25p Low 55p CURRENT 63p
Projected Yield 6.2%
HMV Group
HMV is a music, video and book seller through its’ two retail concessions HMV & Waterstones. Its share price has been hit over the last few years by competition from internet rivals both for the sale of music and books as well as concerns over the state of UK consumer spending. The share price is down from a high this year of 171p. At the current price the stock is on a 6% yield with the dividend not fully covered by revenue. Analysts however expect revenues to recover during the next financial year ending April 09.
High 171p Low 104p CURRENT 121.5p
Projected Yield 6%
Kingfisher
Kingfisher is potentially one of the most interesting and heavily hit retail shares with its strong exposure to the UK housing market. Kingfisher owner of B & Q is synonymous with UK DIY. However what is not known by many investors is that half of it’s’ revenue are now generated internationally in France, Poland and China amongst other countries. Whilst the UK is turning down sales in many of its foreign markets are booming away. With its property portfolio having a valuation of over £3billion compared to its current market cap of just over £4 billion its share price is pretty well backed by tangible assets. As recently as June this year broker SG Cross Asset Research had a target price of 354p. Billionaire Warren Buffets Berkshire Hathaway has a stake in the business and to top it all; the current yield is a more than respectable 6.5% and is just covered by the projected earning to the end of January 08.
High 284p Low 164.8p CURRENT 173.1p
Projected yield 6.5%
THE INCOME MONKEY VERDICT
The Market is clearly pricing in a big slump in consumer spending over the next couple of years. There could be an opportunity for savers and investors seeking income to buy into high yielding stocks on the basis that expenditure does not slump by the degree expected and that these companies continue to pay a high and rising dividend income through to the next up turn in the consumer spending cycle.
The current valuations of some retail stocks indicate a market consensus that British consumers are going to have to pull in their spending and the good time for these retailers is over for now.
The Income Monkey suggests that the current falls are over done. Investors and savers that are focused on maximising their investment income might want to take a punt on these income stocks and the fact that their sales are sufficiently sustained to allow these household names to maintain their high dividends even during the coming leaner times. What the market may have missed in several cases is that what are perceived as largely UK focused businesses are increasingly deriving their revenue from abroad and therefore are as much as a play on globalisation as they are on the health of the UK economy. Read on for some domestic income & savings opportunities.
DSG International
This company owns the brands Dixons, Currys and PC World. The market is concerned that its core markets of electricals and PCs will be hit hard by any slowdown in consumer spending. The share price has fallen from a high this year of 220p to just above its year low of 117p. The result is a healthy projected yield of just under 8%. The downside is that the dividend is only just covered by income and therefore if trading worsens more than expected there is always a danger that it could be cut.
High 220.25p Low 116.6p CURRENT 117p
Projected yield 7.7%
Debenhams
Since floating at 200p in 2006 Debenhams the UK’s second biggest department store has disappointed the market and had slumped to a low of just under 90p earlier this year. It has now bounced a little after an up beat trading statement in recent days which showed that despite like for like sales decline overall profits rose because of new store openings. The yield is not as healthy as some with a projection of 6.4% for the year ending august 08. However, the dividend income should be relatively safe giving it is covered just under twice by projected earnings.
High 203.75p Low 89.5p CURRENT 112.25P
Projected yield 6.4%
Pendragon
Pendragon is the UK’s biggest car dealer. The company used to specialise in luxury brands such as Porsche and Ferrari but has recently moved into selling main stream models by Ford and Vauxhall. The share price has slumped from a high of 125p earlier this year to trade at a little over half this level although it now stands above its low. Valued at a little over £400m with sales of £5 billion the yield for the financial year ending December 07 its’ yield is 6.2% rising to a projected 7.2% for 08.
High 125.25p Low 55p CURRENT 63p
Projected Yield 6.2%
HMV Group
HMV is a music, video and book seller through its’ two retail concessions HMV & Waterstones. Its share price has been hit over the last few years by competition from internet rivals both for the sale of music and books as well as concerns over the state of UK consumer spending. The share price is down from a high this year of 171p. At the current price the stock is on a 6% yield with the dividend not fully covered by revenue. Analysts however expect revenues to recover during the next financial year ending April 09.
High 171p Low 104p CURRENT 121.5p
Projected Yield 6%
Kingfisher
Kingfisher is potentially one of the most interesting and heavily hit retail shares with its strong exposure to the UK housing market. Kingfisher owner of B & Q is synonymous with UK DIY. However what is not known by many investors is that half of it’s’ revenue are now generated internationally in France, Poland and China amongst other countries. Whilst the UK is turning down sales in many of its foreign markets are booming away. With its property portfolio having a valuation of over £3billion compared to its current market cap of just over £4 billion its share price is pretty well backed by tangible assets. As recently as June this year broker SG Cross Asset Research had a target price of 354p. Billionaire Warren Buffets Berkshire Hathaway has a stake in the business and to top it all; the current yield is a more than respectable 6.5% and is just covered by the projected earning to the end of January 08.
High 284p Low 164.8p CURRENT 173.1p
Projected yield 6.5%
THE INCOME MONKEY VERDICT
The Market is clearly pricing in a big slump in consumer spending over the next couple of years. There could be an opportunity for savers and investors seeking income to buy into high yielding stocks on the basis that expenditure does not slump by the degree expected and that these companies continue to pay a high and rising dividend income through to the next up turn in the consumer spending cycle.
Wednesday, 24 October 2007
I love irrational investment markets
I love irrational markets. Markets are generally irrational. They are founded on FEAR and GREED. Both very human emotional concepts and therefore arguably irrational.
Before i sail of into a voyage of Freudian analysis I think it is worth examining these concepts in respect to the state of the current stockmarkets approach to income producing property shares.
For the last few years markets have been getting carried away on a tidal wave of property investing euphoria. A lot of property investors have been making lots of money. Other investors have seen this and investors being GREEDY have dived in in the hope that they too will make lots of money. This forces the price of property making it less likely that investors will make money.
The realisation by investors and the markets that too many investors were investing in property and at too high a price has prompted by the so called 'credit crunch' has forced investors to dramatically reappraise their investment decisions. Many investors are thinking 'oh god i've paid too much for these property investment companies - lets get out.' Then the FEAR cuts in. They panic and sell. This forces down the price, more panic and sell forcing down the price even further. Its a property investment meltdown.
This is a great opportunity for all income monkeys.
Falling share prices of these property investment stocks have slashed their price. In the case of Mapeley which the Income Monkey is particularly keen on, by over 100% in less than 6 months.
Have the value of the assets of these property investment companies property fallen by that much, have their rents shrunk by that much, have their costs gone up by that much. NO off course they haven't.
YES - property investments were overvalued. The IPD index showed that UK commercial property returns in August were the worst in 15 years and that forecast show that 08 & 09 are going to be tough.
However this is the great thing for income seeking investors and savers.
Before i sail of into a voyage of Freudian analysis I think it is worth examining these concepts in respect to the state of the current stockmarkets approach to income producing property shares.
For the last few years markets have been getting carried away on a tidal wave of property investing euphoria. A lot of property investors have been making lots of money. Other investors have seen this and investors being GREEDY have dived in in the hope that they too will make lots of money. This forces the price of property making it less likely that investors will make money.
The realisation by investors and the markets that too many investors were investing in property and at too high a price has prompted by the so called 'credit crunch' has forced investors to dramatically reappraise their investment decisions. Many investors are thinking 'oh god i've paid too much for these property investment companies - lets get out.' Then the FEAR cuts in. They panic and sell. This forces down the price, more panic and sell forcing down the price even further. Its a property investment meltdown.
This is a great opportunity for all income monkeys.
Falling share prices of these property investment stocks have slashed their price. In the case of Mapeley which the Income Monkey is particularly keen on, by over 100% in less than 6 months.
Have the value of the assets of these property investment companies property fallen by that much, have their rents shrunk by that much, have their costs gone up by that much. NO off course they haven't.
YES - property investments were overvalued. The IPD index showed that UK commercial property returns in August were the worst in 15 years and that forecast show that 08 & 09 are going to be tough.
However this is the great thing for income seeking investors and savers.
- whilst property prices may come down rents a property companies main source of income doesn't. Lower property prices actually benefit income investors as they mean that rental yields go up allowing property investment companies to pay out even more in dividends.
- the values of investment property may go down, however, rents very rarely do. In fact GVA Grimley the property consultants research has predicted rental growth averaging 3% for 2008 & 2009. This means that rental income from which dividends are paid is generally secure.
- A falling property market is likely to knock consumer confidence reducing economic activity and prompting a cut in interest rates. This will reduce property investment companies biggest overheads meaning that their net income should increase giving them greater scope to pay larger dividends
All this seems to indicate that the equity markets are acting with exuberant irrationality. Investors should release that markets cant afford to act irrationally for long as the equilibrium between investor FEAR & investor GREED falls once again into an uneasy equilibrium.
Income investors and savers should ignore short term FEAR and look to the long-term income stream
Saturday, 20 October 2007
Theres income in foreign property investment
Investors over the last few years have associated the word property as a bye-word for fast investment profits, extraordinary investment returns and stories of individual investors going from rags to riches over night. With house prices booming in the UK; up by 300% in 10 years, more and more UK investors looked to replicate this experience in undiscovered parts of the world. Combined with the potential financial investment rewards may like the cache of telling their friends at their next dinner party that they are not actually a financial control clerk in an SME but that they are actually a budding international property investor.
Wearing my multiple hats of town planner, surveyor, property investor and equity investor I travelled around Eastern Europe and the Baltic States of Latvia, Lithuania, Estonia in the early part of the Millenium and I was convinced that these beautiful countries with grand and neglected cities were going to experience an economic boom and off the back of that a thriving property market. However, I resisted the temptation to invest for very practical reasons.
- Language barrier
- Not understanding the legal & planning system
- The practicalities of not understanding the areas of a city or town, which are the good areas to buy a potential investment property and the places to avoid
- The difficulties in managing a property. If a boiler goes in this country it is difficult enough to sort out but at least you can always pop round and check that the plumber really has installed a new boiler and not billed you as such but then just replaced a part. If this happened in Poland or Estonia it could be many years if ever before you realise you’ve been paying for work that was never done
All these factors meant that I never did get around to investing in eastern European property although I was convinced of its’ potential.
New buy-to-let industry for international property investors
In recent years there has been an explosion in a whole new industry catering for westerners to invest in international buy-to-let. English speaking agents, letting agent, even companies building purpose built buy-to-let accommodation ready to be bought and let out. At this point an investor should know that the real investment opportunity has gone. I would have willingly bought a beautiful but shabby apartment house in the old part of town because that was going to be the Kensington or Chelsea of the revived country. I’m not interested in buying a non descript box in the equivalent of the Isle of Dogs. To invest I would only want a trophy asset, however these investment properties would now come along with a trophy price tag.
Wall of money
The result of the wall of foreign investment money flooding the residential investment market of these emerging countries is that often their property markets now have values that are on a par and in some cases like Estonia are more expensive than their western neighbours. This has occurred at the same time that their real economies whilst growing fast still only afford their people a fraction of the wealth of neighbouring western economies. According to the Economist Intelligence Unit in late 2006: Croatia GDP per head was $11,050, Estonia $14,120, Slovenia $21,260 & Bulgaria $4,820 compared to the UK’s $42,430.
This all begs the question if the westerner stop buying because they can’t get the money from their banks, or decide that international property investment is a bad idea, then in purely local valuations these properties particularly the non descript boxes are only worth a fraction of the price at which they were sold. This is exactly why in the end I decided not to invest directly in foreign residential property.
There is however a much better way of investing in the undoubted growth prospects of the emerging economies and property markets of Eastern Europe and the Baltic states.
How to become an international property investor from the comfort of your armchair
Having been a property investor in the UK residential investment market for over two decades and despite the availability of property management websites such as www.propertyhawk.co.uk; which enable me to manage my buy-to-let investment properties online. There are still practical difficulties in direct investment in residential property. These are:
- Managing tenants and tenancies
- Maintenance
- Finance & accounting
- Complying with legal and safety requirements
- Short term nature of tenancy and potential voids period
An investor who buys shares in companies that own commercial property avoids all these practical difficulties and the potential residential investment property bubble that may be developing whilst obtaining exposure to the high growth potential of these emerging economies.
The Stock Exchange has in the last couple of years seen a barrage of property investment companies listing which invest in a range of commercial properties in Eastern Europe and the rest of the world. Investors who pick wisely can buy shares producing a hassle free dividend income as well as potentially benefit from the capital appreciation of the underlying property portfolio through an appreciating share price.
The credit crunch throws up some property income investment gems
The impact of the global credit crunch on property companies share price has been severe. Markets have responded to the anticipated lower growth in capital values by knocking 40 50 60% of the value of these companies in only a few months. The result is some income investment gems where it is now possible to buy shares in property companies investing in growing eastern European economies at big discounts to their underlying asset value and also yielding 8%+ on existing and planned dividend payouts.
Which companies should you buy?
The Income Monkey particularly likes the following investment property shares
as an income play:
Dawnay Day Carpathian
Company admitted to AIM in July 2005 with the intention to invest in a diversified portfolio across 6 countries in Central and Eastern Europe. The intention is to pay a dividend of 10p for the financial year ending December 2007.
High 135p low 98.25p CURRENT 100.50p market cap
Projected dividend 10p Yield 10%
Raven Russia
This company is a great play on the fast expanding Russian economy. One thing that any expanding economy needs is warehousing with which to serve the shops and businesses. The Russian economy has a massive shortage of this space. Raven Russia aims to provide A grade warehousing facilities by funding the developments with a local development partner. It than buys the completed development at a pre-agreed price. It is currently forecasting an ungeared yield of 12.4% which means that it can afford to pay out big dividends. It is expected to yield just over 5% paying a dividend of 5.5p for this year. This dividend the company expects to rise to 9p when the development portfolio is fully let giving rise to a yield of just over 8% at the current share price of 107.75p.
High 126p low 88.5p CURRENT 107.75 market cap £460m
Projected yield 8%
Equest Balkan Properties plc
Equest Balkan Properties plc is a commercial property investment company focused on South Eastern Europe but primarily Bulgaria and Romania. Its’ objective is to invest principally in a range of income-producing; commercial, retail and industrial property opportunities in or around the major cities of Bulgaria, Romania, Albania, Bosnia & Herzegovina, Croatia, FYR, Macedonia, Serbia & Montenegro and Turkey, where it considers investments have potential for capital appreciation. The Company may also invest in development projects where it expects high rental yields. It may also invest selectively in land acquisitions.
High 132.5p Low 85.5p CURRENT 85.75 market cap £120m
Projected yield 8.75%
Prospect Epicure J-REIT Value Fund
For those investors that are looking for high yielding investment opportunities outside the EU then they should look at Prospect Epicure J-REIT value. This company is an Isle of Man registered company which was set up to invest in the exciting opportunities represented by the Japanese real estate market. It intends to do this by investing in Japanese property REITs. The Japanese property market has been in a massive slump since the 90’s but with the general recovery in the Japanese economy is showing signs of recovery. It is targeting a 7% yield on its offer price of 100p which at its current price of 85.25p equates to a yield of just over 8%.
High 135.25p Low 74.5p CURRENT 85.25p market cap £86.10m
Projected yield 8%
Mapeley
Investors that still have faith in the UK property market want to have a look at Mapeley. This share has slumped from a high of just over £40 early this year to currently trading at a little over £18. This puts them on a massive yield of 9.6% forecast to rise to 10.4% next year. With a rock solid set of tenants including the Government and Abbey National and several large outsourcing contracts their income seems assured. The market seems to be marking them down savagely because of concerns over the future of the UK commercial property market. With the shares being valued at a discount to the net asset value of £745million at a discount of 27% the value of UK commercial property would have to fall off a cliff for investors to be holding a share with less value than that of the property it owns. With interest rates set now to fall in the foreseeable future income investors may not see yields like this on a property investment for a very long time. It’s clear that investors should fill their boots before sanity in the investment market returns.
High £40.30 Low £18.30 CURRENT £18.41 market cap £542 million
Yield 9.6% Prospective Yield (08) 10.4%
The Income Monkey verdict
Income junkies want to hold onto their nerve with the current uncertainties in the investment property market caused by the credit crunch. Property prices across the globe are fully valued and are likely to fall. However, those wise investors who can see past the short term investment market worries and who buy these property stocks can afford to ride out any dip in the capital values of these shares with the sound knowledge that they are receiving a strong dividend income backed by a secure and rising rental stream. In time growing economies and a stabilising property investment market means that capital values will rise and investors will also benefit from appreciating asset values and rising share prices.
Thursday, 18 October 2007
Northern Rock - investment income gem?
For most investors these two words fill them with dread. There are those investors who spent time worrying about the safety of their deposits or sometime lifetime investment savings. Those poor investors who have witnessed the value of their investment drop from a high of a little over £12 earlier this year to just over £2 at the present time.
Like all investment ‘car crashes’ there is always a contrarian investment play. With shares in the Rock falling like a stone could there by an income investment gem sitting there waiting to be discovered?
PIBS – investment income opportunity
Northern Rock like many other former building societies issued what were called PIBS. PIBS or Permanent Interest Bearing Securities or Permanent Subordinated loans as they are known where they relate to demutualised building societies such as the Northern Rock. These securities are fixed income investment stocks or loans. They were issued by building societies to raise additional capital. They offer investors a set investment income - the gross coupon price - paid twice yearly, net of basic rate tax. PIBS are traded on the London Stock Exchange, the capital value of Permanent Interest Bearing Shares moves in response to interest rates, as do gilts. If rates rise, the capital value reflected in the buying price falls and vice versa. This in turn determines the gross investment yield PIBS earn. Unlike other loan stock such as gilts there is no redemption date on which the capital is repaid. They are open ended in the respect that these investments can be redeemed by the borrower at any stage or never.
For example
A Coventry Building Society PIBS was issued with a coupon rate of just over 6%, the price of that stock issued at a 100p is trading at 96p meaning that the effective gross yield stands at 6.35%
PIBS risk vs reward
Most PIBS will generate a yield of about 1% above the best deposit rates available at between 6.3 and 7.3%. This reflects that they have to be bought through a stockbroker so that the investor incurs a cost of acquisition and sale and also the fact that there is a small amount of risk associated with them. The risk of these investments is that as a secondary debt, holders of the stock would not benefit from the deposit insurance schemes operated by the Government and also as secondary debt the holders would be the last in line for payout should the former building society ever go bust. The fact that the interest rates are only marginally above the current highest investment deposit rates shows that the investment markets perceives these stocks as very very low risk investments.
The Northern Rock PIBS paradox
This brings me back to the Rock as an investment income play. Northern Rock PIBS at the time of writing stand at 87.5p. The coupon interest rate stands at 12.626% meaning that the gross yield is an eye watering 14.4% before acquisition costs. What are the risks to an investor?
The main risk to a holder of Northern Rock PIBS is that the building society will go bust and there are insufficient funds to pay the holders of the stock and investors end up with nothing. The fact is that the Government, the Bank of England, the UK banking system simply can’t afford this to happen.
The fall out of a major UK bank going bust particularly now the Government has put its ‘neck on the line’ to protect savers deposits would cause a complete political and financial melt down and a crisis of confidence in the UK financial system that would rock the UK’s economy to its foundations. In short – it ‘ain’t’ going to happen. The overwhelming most likely scenario is that Northern Rock will be taken over. In this case there are two likely scenarios
Like all investment ‘car crashes’ there is always a contrarian investment play. With shares in the Rock falling like a stone could there by an income investment gem sitting there waiting to be discovered?
PIBS – investment income opportunity
Northern Rock like many other former building societies issued what were called PIBS. PIBS or Permanent Interest Bearing Securities or Permanent Subordinated loans as they are known where they relate to demutualised building societies such as the Northern Rock. These securities are fixed income investment stocks or loans. They were issued by building societies to raise additional capital. They offer investors a set investment income - the gross coupon price - paid twice yearly, net of basic rate tax. PIBS are traded on the London Stock Exchange, the capital value of Permanent Interest Bearing Shares moves in response to interest rates, as do gilts. If rates rise, the capital value reflected in the buying price falls and vice versa. This in turn determines the gross investment yield PIBS earn. Unlike other loan stock such as gilts there is no redemption date on which the capital is repaid. They are open ended in the respect that these investments can be redeemed by the borrower at any stage or never.
For example
A Coventry Building Society PIBS was issued with a coupon rate of just over 6%, the price of that stock issued at a 100p is trading at 96p meaning that the effective gross yield stands at 6.35%
PIBS risk vs reward
Most PIBS will generate a yield of about 1% above the best deposit rates available at between 6.3 and 7.3%. This reflects that they have to be bought through a stockbroker so that the investor incurs a cost of acquisition and sale and also the fact that there is a small amount of risk associated with them. The risk of these investments is that as a secondary debt, holders of the stock would not benefit from the deposit insurance schemes operated by the Government and also as secondary debt the holders would be the last in line for payout should the former building society ever go bust. The fact that the interest rates are only marginally above the current highest investment deposit rates shows that the investment markets perceives these stocks as very very low risk investments.
The Northern Rock PIBS paradox
This brings me back to the Rock as an investment income play. Northern Rock PIBS at the time of writing stand at 87.5p. The coupon interest rate stands at 12.626% meaning that the gross yield is an eye watering 14.4% before acquisition costs. What are the risks to an investor?
The main risk to a holder of Northern Rock PIBS is that the building society will go bust and there are insufficient funds to pay the holders of the stock and investors end up with nothing. The fact is that the Government, the Bank of England, the UK banking system simply can’t afford this to happen.
The fall out of a major UK bank going bust particularly now the Government has put its ‘neck on the line’ to protect savers deposits would cause a complete political and financial melt down and a crisis of confidence in the UK financial system that would rock the UK’s economy to its foundations. In short – it ‘ain’t’ going to happen. The overwhelming most likely scenario is that Northern Rock will be taken over. In this case there are two likely scenarios
- either the PIBS will be retained in which case investors will continue to receive their bumper investment income payout in perpetuity or until the new owners decide to redeem the loan. At which point the investor would receive the issue price of 100p making a tidy investment profit
- the new owners will redeem the stock at the issue price of 100p meaning the investors receive their investment profit early but don’t benefit from the advantages of the ongoing investment income
Less risky investment income PIBS
For those investors with less of an appetite for investment risk then there are PIBS for many of the Building Societies that are not in such ‘financially challenging’ positions as the Northern Rock is. Examples of some investment rates as of 10.12.07 are:
Source: Collins Stewart
Bradford & Bingley coupon 11.625 158p Yield 7.36%
Bank of Ireland coupon 13.375 182 Yield 7.35%
Kent Reliance coupon 7.875 112 Yield 7.03%
Monday, 15 October 2007
A PROPERTY INCOME GEM
If I were to tell you about a share that has:
- Almost halved in value
- Is run by one of the UK’s most respected names in property
- Has a list of blue chip clients
- Who’s price is fully backed with it’s UK property assets in fact it is trading at a discount to net asset value of 17% according to its trading statement ending June 07
And best of all Yields just over 9%
Would you be interested?
Credit crunch
Like any financial crisis the recent credit crunch has caused investors to re-evaluate their risk and investment priorities. One sector that has suffered particularly badly is property as the market prices in higher borrowing costs and slowing or potentially falling asset values. This in my view has thrown up some very interesting investment opportunities for the Income Monkey which I will investigate in the coming months.
One such opportunity is a company called Mapeley.
http://www.mapeley.com/
Property outsourcing
You probably have never heard of them but if you have ever visited an Abbey National premises or been inside a tax office then the chances are you will have been inside one of their properties. This is because one of the key aspects about Mapeley is that they are what is called an outsourcing company. This means that they look after every aspect of their clients property requirements which means that the Abbey National or HMRC don’t have to worry about getting their buildings fixed or dealing with planning departments or buying new properties or disposing of surplus space. All of it is taken care of by Mapeley. The benefit for Mapeley is that they receive a regular income from these blue chip organisations as well as any rent from the properties they own. They currently own over £2 billion in property and own or manage over 1650 properties. The contracts are not short term either spanning a 25 year period.
Why the city has fallen out of love with Mapeley
The share price of Mapeley peaked back in April at just over £40, since then it has been pretty much a down hill run with the shares falling as low as £19.64 in September in the wake of the ‘credit crunch’.
The city has fallen out of love with property shares generally but Mapeley has been particularly hard hit for several reasons:
- It’s A typical business model of outsourcing which makes it hard to value as a property share. Most property companies are either predominantly investment companies or development companies. The former being valued in relation to their asset values (typically at a small discount) or as development companies where profits are the key factor in analysts valuations. Mapeley whilst having an increasing exposure to investment still derives most of its income from outsourcing.
- The market is worried that the company that has only recently been actively investing directly in property may have bought at the peak of the market. In Mapeley’s defence they would argue that their unique position of having a close relationship with clients and a strong regional presence means that they have been able to secure investments at a good price allowing them to retain a strong yield on their portfolio. For instance in their most recent set of interim results they reported that the acquisitions of £75.7 million during the period had a net initial yield of 7.1% which easily covers the cost of any borrowing.
- The big worry for any investor in Mapeley is that they loose one of their outsourcing contract undermining their income and ability to pay a dividend. This is unlikely any time soon as the contracts were for 25 years and any attempt by the companies to get out of them will cost them dearly.
- Outsourcing contracts which were the flavour of the month back at the start of the millennium have fallen out of flavour in recent years as companies have realised they can make potentially more money out of property then they can out of selling widgets. Therefore, few have been signed in the last couple of years. The last one won by Mapeley was back in 2006 with the passport agency to manage 69 offices. This may change soon when companies realise that property prices fall as well as rise and looking after their accommodation requirements is a big cost and hastle to their business.
Mapeley a must for the Income Monkey
The reasons to be attracted by Mapeley are obvious. Look at that great fat income of 190p for the financial year ending December 2007. This equates to a yield of just over 9% covered just over once. The other good thing for income junkies is that the dividend is paid quarterly meaning that you get your hands on your money four times a year. The current forecast from digitalook www.digitalook.com is for a dividend of 208p equating to a mouth watering dividend yield of 9.7% for the year ending December 2008.
The attractive thing for an income investor is that rents rise and the outsourcing contracts are for fixed fees meaning that even if the expected downturn in commercial property prices occur, the rising income should allow the company to continue to pay a large and rising dividend payment.
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