Forget buy-to-let, this FTSE 100 income stock is a better buy in my mind

A portfolio of freehold property gives this FTSE 100 (INDEXFTSE: UKX) a one-of-a-kind quality says Rupert Hargreaves.

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In my opinion, shares will always be a much better investment than buy-to-let because they require minimal babysitting and you can sell them at a click of a button. 

That’s why I’m recommending FTSE 100 retailer Morrisons (LSE: MRW) as a better buy for your portfolio than buy-to-let property.

Best of the bunch

Morrisons isn’t the largest supermarket retailer in the UK, but it stands out to me for several reasons. 

First of all, unlike so many other retail groups, the company owns the freehold on the majority of its properties. This means Morrisons has a robust and asset-rich balance sheet. Management has also emphasised debt reduction in recent years. Net debt has declined from nearly £3bn in 2014 to around £1bn today, a level that seems sustainable because the group has more than £8bn of fixed assets.

Cash generation is another attractive feature of this business. Unlike many of its retail sector peers, its large freehold property portfolio means that Morrisons saves hundreds of millions of pounds in rent every year. Reduced costs mean the company is highly cash generative. For the financial year ending February 2018, the group generated free cash flow from operations after capital spending of £244m, easily covering the total dividend cost of £129m and the remainder was used to pay down debt.

Even though the stock’s current dividend yield isn’t that attractive (it sits at 3.6% today) the qualities outlined above suggest to meet that this company could be a tremendous long-term income buy for your portfolio. I expect the payout to rise substantially in the years ahead as the group switches from debt reduction to shareholder capital returns.

One to avoid

Morrisons’ dividend outlook is only improving, but one company that’s struggling to meet its obligations to investors is McColl’s Retail (LSE: MCLS). Today, the convenience store chain announced that for the year ended November 25, pre-tax profit slumped to £7.9m from £18.4m a year ago, even though revenue increased 8.1% year-on-year.

Rising costs were the group’s biggest problem. Administrative expenses increased 9.6% and finance costs surged 19%. Unfortunately, management doesn’t expect trading to improve substantially in 2019. Today, the company told investors that it expects a “modest improvement” in year-on-year adjusted EBITDA for 2019. The firm reported adjusted EBITDA of £35m for fiscal 2018.

With profits falling and no turnaround expected in the near term, management has decided to slash McColl’s dividend payout. The retailer proposed a final dividend of 0.6p, giving a full-year payout of just 4p. That’s down 61% from last year’s total payout of 10.3p.

What’s curious about this reduction is the fact that in its earnings release, McColl’s reported a “material” (31%) decline in net debt for the year to the end of November, and a 15% jump in net cash generated from operating activities during the period. 

So, even though the group’s financial position is improving, management has decided to reduce shareholder distributions. With this being the case, I would avoid the business for the time being, until its outlook improves.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended McColl's Retail. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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