It’s been a rough couple of months for British Land Company (LSE:BLND). The dividend stock has seen its valuation slashed by nearly 35% over the last 12 months. And this negative momentum appears to be continuing, at least for now.
On the plus side, the steady decline in market capitalisation has sent the yield to an impressive 6.7%. And providing management can maintain shareholder payouts, this could be a rare buying opportunity for income investors. So, let’s take a closer look at what’s going on and whether maintaining dividends seems realistic.
The distraction of a shrinking London property market
Real estate is a cyclical industry. And on the back of rising interest rates, as well as an outflow of Russian money, property values in London have been falling lately. At least, that’s what’s reflected in British Land’s real estate portfolio.
Looking at its results for its 2023 fiscal year ending in March, the total valuation of the firm’s locations dropped from £10.5bn to £8.9bn — a 12.3% decline. This is hardly surprising given that a chunk of British Land’s portfolio contains premium office space where demand had been falling due to remote working.
However, management is fully aware of this threat. It has been focusing on life science facilities and campus properties to diversify away from this risk exposure. And the strategy seems to be working.
After stripping out the effects of property valuation changes, earnings actually grew by 6.9%, reaching £264m. This was driven almost entirely by a 5.9% like-for-like net rental price hike paired with elevated occupancy levels of 96.7%.
In other words, while this dividend stock has fallen, cash flows are rising. So, it should be no surprise that management just increased shareholder payouts by a further 3.3%, pushing the dividend per share to 22.64p.
Nothing is guaranteed
Rising cash flow and increasing shareholder payouts are certainly characteristics of a potentially winning income investment. However, even with these encouraging underlying results, there remain several prominent threats to the enterprise, the biggest being rising interest rates.
Building and maintaining a real estate empire isn’t cheap. And British Land has had to borrow a lot of money along the way through mortgages. With central banks still busy fighting inflation via interest rate hikes, the cost of servicing its loan obligations is mounting.
A closer look at the financials shows a slowly rising interest bill as well as higher costs relating to hedging against interest rate risk.
The firm still has around £125m in cash as well as the ability to dispose of underperforming locations should it suddenly need to raise capital. Therefore, I’m not concerned about the risk of insolvency. However, continued pressure from loan obligations could chip away at the excess capital available to fund dividends.
A dividend stock worth buying?
All things considered, the concerns surrounding the business are understandable. But I can’t help but think investors may have over-punished the stock based solely on the drop in property valuations.
With that in mind, I feel today’s share price provides a nice entry point for income investors. British Land shares will likely continue to be volatile until economic conditions recover. But the dividends look sustainable for the long run. At least, that’s what I think.
