The Land Securities Group (LSE: LAND) share price has toppled 36% in 2022. Based on its dividend forecast for this fiscal year (to March 2023), this means Landsec shares now carry an enormous 7.5% dividend yield.
This reading beats the FTSE 100 forward average of 4.2%. And the property stock’s yield could get even better for financial 2024. For that year it should rise to 7.8%.
Landsec has had its fair share of troubles since the pandemic. But could now be the time to buy the battered business for my portfolio?
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Dividend growth
Land Securities cancelled dividends entirely during the height of the pandemic. But the business has been raising payouts again since fiscal 2021.
It paid a 37p per share annual dividend for last year. City analysts expect dividends to rise to 37.85p this year and again to 39.22p in fiscal 2024.
That said, dividend forecasts aren’t covered very well by predicted earnings. This means payouts could fall short if Landsec doesn’t earn as much as expected. For the next two years dividend coverage sits at 1.3 times. A figure of at least 2 times is the target for investors.
Is it a buy?
First let’s look at the good stuff. I like the huge investment Land Securities is taking to revamp its retail properties. Steps to improve the shopper experience is essential as consumers migrate towards e-commerce. And it could pay off handsomely as people reconnect with physical retail in the post-pandemic environment.
However, there’s a danger that the group will continue to swim against the tide as digitalisation increases. It’s not just the impact of e-commerce on its retail business that I’m concerned about. The growth of flexible working also poses a threat to its office portfolio.
The business also faces considerable near-term danger as consumer spending in the UK sinks. In this landscape there could be a surge in the number of its tenants going bust and asking for rent reductions.
The British Retail Consortium reported that total sales rose just 2.2% in September in its latest release. This will likely be far behind the expected rate of consumer price inflation (tipped to be around 10% and could get much worse as energy prices soar).
Debt concerns
As a potential investor, I’m also put off by the enormous rise in borrowing costs that the shopping centre operator faces. Analysts at Goldman Sachs think gross financing costs for Land Securities will rise by around 75% during the next five years, the Financial Times reported. The company had a whopping £4.2bn worth of net debt on its books as of March.
Incidentally, Goldman Sachs also thinks that prices of commercial properties will fall 15-20% between June this year and the end of 2024.
I like Landsec’s enormous dividend yields. I’m also a fan of its low P/E ratio of 10.4 times. But this FTSE 100 share has all the hallmarks of a classic dividend trap. I’d prefer to buy other income shares today.
