Land Securities Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest. High-yielding stocks can prove to be a double-edged sword. While they offer the prospect of a very generous income return, in many cases, they have high yields for good reason. Their shares may have fallen heavily, thereby prompting an elevated yield, due to weak underlying financial performance, an uncertain outlook or because their dividends are not well covered by profits. Therefore, in Questor’s view, income investors should exercise a significant amount of caution when considering the purchase of a stock whose yield seems too good to be true. Of course, in some instances, high-yielding shares offer favourable long-term income investing outlooks. For example, real estate investment trust (Reit), Land Securities, has a dividend yield of 7.1pc and improving financial prospects after what has been a hugely difficult period. It has suffered greatly from the negative impact of higher interest rates on commercial property prices. Over the past two financial years, for instance, its net asset value per share has declined by 19pc as higher borrowing costs have weighed on demand across the sector. Furthermore, the evolution of working and shopping habits following the pandemic has exacerbated the overall feeling of uncertainty faced by the company. As a result, its share price has fallen by around 44pc since the start of the pandemic. It now trades on a price-to-book ratio of just 0.6, which suggests investors have priced in a sizable future decline in commercial property prices. But with the company reporting a return to modest growth in property values in its latest half-year results, its shares now appear to be severely undervalued. Moreover, the trust’s operating environment should improve over the medium term. Interest rate cuts, while now set to be slower paced than previously expected as a result of the Budget, are nevertheless likely to be implemented in the coming months. A looser monetary policy ought to have a positive impact on commercial property prices, while bolstering demand among prospective tenants that stand to benefit from an improving economic outlook. Separately, Land Securities is focusing on higher-quality assets that are more likely to enjoy stronger levels of rental growth and occupancy. Since 2020, the company has made £3.1bn of asset disposals, with its balance sheet being in a relatively strong position to both invest for future growth and overcome near-term economic challenges. Story Continues Its loan-to-value (LTV) ratio currently stands at a relatively modest 34.9pc, for instance, while the company’s latest half-year results showed that overhead costs were cut by 10pc. It expects to make further efficiencies over the next two years that could, when combined with an improved operating environment, have a positive impact on the company’s dividend prospects after shareholder payouts were increased by 2.2pc in the first half of the year. Of course, investor sentiment towards Land Securities remains downbeat. Its shares have fallen by 40pc since they were first tipped by Questor in June 2018, thereby lagging the FTSE 100 index by 45 percentage points. Even when dividends are factored in, the stock’s total return is a thoroughly disappointing 14pc loss. In the short term, it would be unsurprising if investors remain cautious regarding the company’s outlook. After all, interest rate cuts will take time to have their desired effect on the economy’s growth rate and the performance of the commercial property sector due to the presence of time lags. Given the company’s favourable long-term outlook, however, it now becomes the latest addition to our income portfolio. To make room for it, Regional Reit and Residential Secure Income will both be removed having generated capital losses of 82pc and 34pc, respectively, since being added to the portfolio in October 2016 and April 2020. We will also slightly trim our position in Sirius Real Estate to both raise funds for the notional purchase and as we continue to manage the weightings of individual holdings in the portfolio. As an aside, we remain upbeat about Sirius Real Estate’s income potential. Clearly, Land Securities has experienced significant challenges over recent years that could yet persist in the short run. But its high yield, wide margin of safety and sound strategy mean it offers an attractive risk/reward opportunity that makes it a worthwhile income holding for the long term. Questor says: buy Ticker: LAND Share price at close: 566p Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday from 8pm. Read Questor’s rules of investment before you follow our tips. View Comments
Beware the companies yielding too good to be true dividends
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