Here’s why I’m avoiding this dirt-cheap dividend penny stock!

A dirt-cheap, dividend-paying penny stock with a vast presence sounds good on the surface. This Fool isn’t convinced, however.

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Despite some positive characteristics, one penny stock I will not be adding to my holdings is Hammerson (LSE:HMSO). Here’s why.

Real estate investment trust

As a quick reminder, Hammerson is a real estate investment trust (REIT). In simpler terms, it owns and operates income-yielding real estate. It focuses on commercial properties throughout the UK and Europe and has a primary focus on value retail.

A penny stock is one that trades for less than £1. So what’s the current state of play with Hammerson shares? Well, as I write, the shares are trading for 20p. At this time last year, the shares were trading for 39p, which is a 48% drop over a 12-month period.

The bull case

An argument could be made that Hammerson shares could be a long-term recovery play. The shares are dirt-cheap at current levels. For example, the shares are currently on a price-to-earnings ratio of just 13. Furthermore, the shares are on a price-to-book ratio of just 0.4 which indicates the shares could be undervalued.

Next, REITs are designed to reward investors by paying 90% of profits back to shareholders in the form of dividends. These dividend payments could boost my passive income stream. Hammerson’s current dividend yield stands at 2%. It is worth mentioning that dividends can be cancelled at any time, however. They are underpinned by performance and are paid at the discretion of the business.

Finally, the commercial property market has bounced back since the pandemic struck. Many businesses like Hammerson struggled during the pandemic and were unable to collect rent from struggling businesses, which affected performance and returns. With restrictions a thing of the past, footfall and property demand have increased.

Why I’m avoiding this penny stock

I do understand that past performance is not a guarantee of the future. However, when I review Hammerson’s track record, it does not fill me with confidence. It has a consistent track record of losses. Furthermore, when the pandemic struck, it came close to liquidation and had to borrow to keep the lights on. With dividend payments being of the most attractive aspects of a REIT, if Hammerson is consistently recording losses, how can I expect to receive any dividends if there aren’t any profits to return to shareholders? This is not the first penny stock with a chequered past I have come across.

Next, Hammerson’s reliance on the retail sector does not sit well with me either. In recent years, the decline of bricks and mortar retailers has been well documented. This has been due to the e-commerce boom and rise in online shopping. The change in consumers’ shopping habits has not helped either and many well established and well known retailers have had to cease trading.

Overall I believe there are better penny stock options than Hammerson for my holdings. In fact, I own several REITs as part of my current holdings. They are better placed to handle risks, possess a stronger balance sheet, as well as much better performance records. Furthermore they operate in more lucrative markets, away from retail. I will not be buying Hammerson shares for my holdings currently.

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.

Jabran Khan 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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