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
Tuesday 27 November 2007
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.
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