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Does a 23% dividend rise make CLS Holdings plc a super income stock?

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With inflation set to rise to as much as 3% this year, a 23% dividend increase is likely to improve investor sentiment in any company. That’s one possible reason why shares in diversified property business CLS (LSE: CLI) have gained over 6% since the release of its results on Wednesday morning. However, given the uncertain outlook for the property sector in the UK in particular, can the company really be classed as a super income stock?

Solid results

The company’s performance in 2016 was robust, even though the operating conditions it experienced were highly uncertain. Its basic net asset value per share increased by 18.8% to 2151p, while net rents increased by 8.2% to £107.1m. This was aided by the company’s lowest ever vacancy rate of 2.9%, and this allowed dividends to grow by 23% for the full year.

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Although operating conditions are still challenging, CLS is investing for the future. It acquired four properties in 2016 for a total amount of £45.7m, which were purchased at an average net initial yield of 6.9%. It has also made five further acquisitions since the end of the year for £31.4m, at a net initial yield of 8%.

Its development progress remains upbeat, while its financial position has also improved. It has been able to reduce the weighted average cost of debt by 49 basis points to 2.91%, which is around 270 basis points below the company’s net initial yield of 5.6%.

Dividend prospects

CLS’s dividend yield of 2.2% may sound rather low. That’s especially the case at a time when inflation is around 2%. However, with shareholder payouts rapidly increasing it has the potential to become an increasingly attractive income play. For example, during the course of the next two years its dividends are forecast to rise by almost 43%, which puts it on a forward yield of 3.2%.

Since dividends are due to be covered 1.8 times by profit in 2018, there seems to be a relatively high chance of further growth in future years. Since the company has a relatively resilient business model that is highly diversified, dividend growth could significantly exceed profit growth over the medium term and allow CLS’s shareholder payouts to remain highly affordable and sustainable. As such, it looks set to become a relatively attractive dividend play in future years.

Competition

However, other property companies such as British Land (LSE: BLND) also offer impressive income prospects. The commercial property business may be expected to record a rise in dividend payouts of just 6.4% over the next two years, but its forward yield of 5.1% is likely to remain ahead of that of CLS for a number of years. Therefore, the income return from investing in British Land is set to exceed that of CLS even when the latter’s stunning growth is factored in.

While both stocks seem to offer excellent value for money based on their price-to-book (P/B) ratios, British Land appears to have the widest margin of safety. Its P/B ratio is just 0.7, while CLS has a P/B ratio of 0.8. With a higher yield and lower valuation, British Land could be the better buy, although CLS is quickly becoming a super income stock.

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Peter Stephens owns shares of British Land Co. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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