With its 5% dividend yield, retail-focused real estate investment trust Hammerson (LSE: HMSO) looks like a perfect income investment at first glance. However, in my opinion, the outlook for this business is shrouded in uncertainty.
How much is it worth?
Over the past decade, trends in the retail industry have shifted significantly. Customers are no longer only heading to gargantuan shopping malls. Instead, they’re doing their shopping online as well. To some extent, Hammerson has been immune to these trends thanks to its flagship ‘supermall’ assets such as the Bullring in Birmingham and Brent Cross in London.
But the company’s recent takeover troubles have brought to light an uncomfortable truth for shareholders – it might not be as immune to sector trends as it would like to believe.
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Specifically, while Hammerson’s own appraisal of its assets indicates that they are worth 790p per share, French peer, Klépierre believes that they might only be worth 635p per share, the second price it offered to buy out existing investors.
It seems Hammerson’s management might also think that the market for retail assets is weaker than its figures show because the company’s proposal to peer Intu, valued its property portfolio at a discount of 32% to net asset value. Shares in Hammerson are currently trading at discount of around 30% themselves.
These numbers do not give me much confidence in Hammerson’s outlook, which is why I believe it could be time to dump the REIT in favour of blue-chip asset manager Schroders (LSE: SDR).
Slow and steady
What I like about Schroders is the fact that the company still has a long runway for growth ahead of it, unlike Hammerson’s cloudy outlook.
Unfortunately, today’s trading update from the company does not match this view. The firm reported today that assets under management dropped 2% during the first quarter of the year, following growth of 13% last year.
However, I’m not overly concerned about these figures because a few days ago Schroders’ peer, St. James’s Place reported a similar performance but blamed it on market movements. Assets under management at the firm expanded, but falling markets had dragged the overall balance lower. I believe Schroders has experienced the same issue. Last year, the group benefited from rising markets and client inflows. Unfortunately, in the first quarter, one of these components has been missing from the equation.
Still, over the long term, this should not prove to be too much of a drag on the company’s earnings growth. As my Foolish colleague, Ian Pierce recently pointed out, as well as the group’s existing position in the UK’s wealth management market, it is also actively expanding into new asset classes and regions such as the US, China and Japan.
As Schroders continues on its steady growth trajectory, City analysts have pencilled in earnings per share growth of 4.5% to 5.5% per annum for the next few years, which is hardly exciting but the stock’s valuation reflects the slower growth. The shares are trading at a forward P/E of 14.6. As a bonus, Schroders supports a dividend yield of 3.5%, and the payout is covered twice by earnings per share. This leads me to conclude that the company might be a better income investment than Hammerson.
