The FTSE 100 is packed full of cheap shares at the moment, but this dividend stock really jumps out at me.
Shares in property developer The British Land Company (LSE: BLND) look insanely cheap right now, as they are valued at just 3.6 times earnings. Given that a P/E of 15 times earnings is considered fair value, this is bargain bucket stuff.
There’s a second reason why this real estate investment trust (REIT) has caught my eye. It currently yields a juicy 5.9%, covered 4.7 times by earnings. Dirt cheap high income stocks are my favourite type of share, so why haven’t I bought this one already?
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Cheap but for a reason
The simple answer is that it’s really risky. British Land investors are hurting right now with the stock down 46.17% over five years, and 23.81% over the last year.
While shares in housebuilders has edged back up lately, British Land carries on falling. Its share price is down whether I measure it over six months, three months, one month, or one week.
The commercial property market scares the beans out of investors these days, as it’s being squeezed on a variety of fronts. The future of the office block is threatened by the working from home trend (although there are signs this is starting to reverse).
Shopping centres are under siege from e-commerce, while both consumers and retailers are being hit hard by the cost-of-living crisis. If tenants go bust, British Land’s rental income will fall. Today’s uncertainty also makes it harder for management to negotiate rent hikes to offset rising costs such as energy.
With inflation sticky and the Bank of England potentially hiking rates to 5% this year, there’s little sign of respite in the immediate future.
I’m thinking of taking a chance
Yet it’s always darkest before the dawn. Things may look bleak today, but sentiment could rapidly shift when the outlook brightens, which is likely to happen when inflation and interest rates finally peak. Struggling stocks often rise fastest in a bull market. Given today’s rock-bottom valuation, British Land could soar.
Its last set of full-year results, published in November, showed a 13.3% jump in first-half profits to £136m, boosted by strong rental growth and cost controls. It’s far from finished and CEO Simon Carter also reported a “strong” lease pipeline.
British Land’s net debt has been cut from a worrying £3.49bn in March 2022 to a slightly less worrying £2.98bn last September, of which 77% is hedged for five years. That’s still high though, only just below the firm’s market-cap of £3.45bn.
The forecast dividend is still a tempting 5.9%, but cover has fallen to just 1.2, which is also weighing on my mind.
Commercial property is arguably the riskiest sector of all, with US banks particularly exposed. The UK wouldn’t escape a meltdown, and nor would British Land. This stock is one of the biggest gambles on the FTSE 100, which is why it’s so cheap, of course.
I’d really, really like to buy it, but I’m just not sure I’m brave enough. This one could go either way. And fast.
