Here is a FTSE 250 penny stock with an almost-12% dividend yield!

This FTSE 250 stock stands out for two reasons. One is that it is a cheap penny stock and another is its double-digit dividend yield. I’m wondering what could go wrong.

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A penny stock can be hugely attractive. It allows me as a shareholder to own a substantial number of the company’s shares by spending a smaller amount of money. It is especially attractive when I might not have a whole lot of money to invest. And it would be even more attractive if it offers a high dividend yield.

Hammerson: high dividends despite pandemic

Take this FTSE 250 stock, which has a dividend yield of almost 12%. I am referring to real estate investment trust (REIT) Hammerson (LSE: HMSO). Specifically, the company focuses on investments in shopping centres across big cities in the UK and it has a presence in other parts of Europe too. With the pandemic having receded significantly, I reckon it might just be a great time to buy up stocks of such companies, which have been hit hard during lockdowns. 

But first I need to assess how much damage the pandemic may have done to the FTSE 250 stock. 

Unsurprisingly, Hammerson has reported losses during the past year. It was not doing much better before that, though. Hammerson has reported losses since 2018. And Covid-19 made the situation even more difficult for it. Between 2018 and 2020, its losses increased by nine times, while its revenues fell. 

Why is it still paying dividends?

Losses are the first big red flag. If the company has consistently reported losses, why is it still paying dividends? Because it is still making profits at an adjusted level even while it runs into losses on a reported basis. Reported numbers are used for regulatory purposes, like taxes. But adjusted numbers reflect the underlying health of the business according to the company itself.

Often, there is unlikely to be a dramatic difference between the two. However, in this case, there is. The big reason for this is that reported earnings have been affected because downward revaluation of properties. This was presumably because of the hit to commercial property values during the coronavirus crisis. But this number is notional and not accounted for in adjusted earnings.

I think that sounds like a fair reason. But I am still uncomfortable with the fact that even before the pandemic, the company was not reporting profits. Additionally, the future of physical stores does not look too bright. The rise of online shopping meant that it was already on the decline before the pandemic started. And the lockdowns have only accelerated its decline.

What I’d do about the FTSE 250 penny stock

Still, I think there is some merit to the stock. The outlook for commercial real estate has improved. With this, Hammerson’s results could start looking up as well. After all, on an adjusted level, it is making profits anyway. 

On balance though, I cannot overlook the fact that the outlook for the segment over the long term is not great. This could continue to keep its share price depressed, while driving up the dividend yield. Right now it just does not sound like a convincing enough opportunity for me to buy. It is on my watchlist, though.

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.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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