Three lessons that investors can draw from the second failed bid for INTU (and a fourth that may yet play out)

Russ Mould
29 November 2018

“A second failed bid for INTU and a third failed takeover approach in the Real Estate Investment Trust sector this year (following Klepierre’s aborted lunge for Hammerson) is weighing heavily on commercial property stocks, especially as INTU is also flagging a substantial dividend cut for 2018,” says Russ Mould, AJ Bell investment director. 

“Those REITs with the greatest exposure to retail are bearing the brunt of investors’ disappointment, with Hammerson and Land Securities down the most, as shareholders begin to despair of whether there will ever be a catalyst that closes up the substantial discounts to net asset value at which these property plays trade.

“There are therefore three lessons which investors can draw from today’s failed bid and dividend alert at INTU.

•        Never buy a stock for a bid alone. You must believe that the company itself is fundamentally attractive and its shares sensibly valued, because if you don’t, why would anyone else want to take on the risk of buying and owning the whole company, let alone just a few shares.

•        Be careful of dividend yields that look too good to be true. The massacre seen in FTSE 100 dividends of 2015-16, when more than a dozen members of the premier index cut their shareholder distributions*, was a warning of this and INTU may be another. Had INTU toughed it out and repeated last year’s 14p-a-share dividend the shares would have been yielding more than 11% today. With the UK base rate just 0.75% and the benchmark ‘risk-free rate’, or 10-year Government Gilt yield just 1.33%, any investor needs to ask at the very least how much capital risk they are taking in pursuit of that sort of yield.

Investors will now no doubt start to look at other REITs and assess how safe their dividends are, looking at each firm’s net debt pile, loan-to-value ratio and investment and development plans.

 

2018E Dividend Yield

Share price (discount)/premium to historic NAV

INTU

11.2%

(57.9%)

Newriver

9.3%

(20.7%)

Hansteen

6.7%

(6.2%)

Hammerson

6.7%

(50.0%)

LandSec

5.6%

(38.6%)

British Land

5.2%

(36.5%)

TRITAX Big Box

4.9%

(4.7%)

Town Centre Securities

4.9%

(36.7%)

A & J Mucklow

4.5%

(7.5%)

Londonmetric Property

4.4%

11.1%

Workspace

3.8%

(15.9%)

Big Yellow

3.7%

33.9%

CLS

3.1%

(26.2%)

Safestore

2.9%

51.9%

SEGRO

2.9%

10.9%

Derwent London

2.2%

(19.6%)

Shaftesbury

2.0%

(9.5%)

Great Portland Estates

1.7%

(16.6%)

St. Modwen

1.7%

(16.6%)

Harworth

0.8%

(10.4%)

Capital & Counties

0.6%

(21.1%)

Source: Company accounts for historic NAV per share figures, Digital Look and consensus analysts' estimates for forecast dividends, Refinitiv data. Dividend forecasts exclude special dividends. INTU dividend based on current consensus for an unchanged pay-out

“It will be interesting to see if the INTU cut prompts investors to pause for thought when it comes to the FTSE 100’s fattest-yielding stocks, even if they all operate in different industries.

“The old rule of any dividend yield that exceeded the 10-year Gilt yield by more than 1.5 times looked dangerous may have been kicked into touch by a decade of record-low interest rates and bond yields, but perhaps J.H. Clapham’s warning about the ‘dangers of blind capital seeking its 5%’ may still apply, given that harks back to another era of low rates and frantic yield-seeking, the 1840s railway stock boom.

 

Ten highest yielding FTSE 100 stocks: 2018 E

 

Dividend yield (%)

Dividend cover

Evraz

12.4%

1.22 x

Persimmon

11.7%

1.17 x

Taylor Wimpey

10.8%

1.37 x

Barratt Developments

9.2%

1.52 x

Standard Life Aberdeen

8.8%

0.95 x

Centrica

8.8%

1.06 x

SSE

8.7%

0.85 x

Direct Line

8.2%

1.08 x

Vodafone

7.9%

0.70 x

Imperial Brands

7.6%

1.42 x

Source: Digital Look and consensus analysts' estimates for forecast dividends, Refinitiv data.

•        Value with no catalyst is no value at all. INTU looks very cheap on a 57% discount to its last historic net asset value (NAV) per share figure of 297p, but the risk remains that the gap closes via a drop in asset values rather than a rise in the share price. 

This is why investors still seem to be fighting shy of those REITs with exposure to retail, the City of London and large development projects, given the uncertainty created by the internet’s ongoing onslaught on bricks-and-mortar retail models and also Brexit.

In the short term markets trade off perception and the current perception is that asset values are going to fall, so something needs to change to alter how the REITs are seen and valued. Ideally, bulls would like to see NAVs stabilise or even go up, and perhaps some visibility on this in a post-Brexit world would help, but that may be a long haul. Until then, a successful bid would serve as a reminder of the value that may exist, but three failed approaches, two for INTU and one for Hammerson, offer little support.

“Those contrarians who feel that the REITs do offer value and are oversold will therefore have to keep sitting and suffering and stay patient. They may also be inclined to suggest investors need to keep a fourth potential lesson in mind from today’s setback at INTU – namely that the darkest hour is always before the dawn. There rarely if ever seems to be a catalyst imminent before a turning point in a stock or sector’s fortunes and that is what can make value investing so rewarding, even if it takes a lot of nerve and patience to see it through.”

*Appendix: FTSE 100 dividend cuts for 2015-16
Fourteen members of the FTSE 100 cut their dividends for 2015 and/or 2016. They were, in alphabetical order, Anglo American, Antofagasta, Barclays, BHP Group (BHP Billiton as was), Centrica, Glencore, Morrison, Rio Tinto, Rolls-Royce, Sainsbury, Severn Trent, Standard Chartered, Tesco and Tullow Oil.

Follow us: