A FTSE 100 stock with near-7% dividend yields! Should I buy it today?

The dividend yields on Land Securities shares smash the broader average of 3.8% for FTSE 100 stocks. Is the company now a slam-dunk buy?

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Those looking for sector-beating dividend yields may be tempted by Land Securities Group (LSE:LAND) shares. For the next two financial years (to March 2024 and 2025), this FTSE 100 property stock’s yields sit at 6.8% and 6.9%, respectively.

Times were especially tough for office and retail space providers after the Covid-19 outbreak. Lockdowns reduced demand for their properties and rent arrears soared, causing profits to reverse and debts to balloon.

But these businesses have been on a steady (albeit bumpy) recovery since the depths of the pandemic. LandSec’s EPRA earnings (which uses rules laid out by the European Public Real Estate Association) rose 11% in the 12 months to March, to £393m.

The post-coronavirus restoration has continued up until the present day too. In late September, the FTSE firm said that “customer demand for [our] best-in-class office space in London has remained strong”.

The growing storm

LandSec reinstated dividends in fiscal 2022 as the market improved and self-help measures kicked in. And City analysts expect them to keep growing over the next two fiscal years.

But I believe LandSec could be a dangerous stock to buy for dividends in the current economic climate. The retail sector is under significant pressure as inflation batters consumer spending power.

Meanwhile, economists don’t believe consumer price growth will fall below the Bank of England’s (BoE’s) 2% target any time soon (the OECD reckons UK inflation will average 2.9% next year, the highest among any G7 nation).

Inflation could surpass these expectations too if a war in the Middle East drives up oil prices and disrupts supply chains. This would put even more pressure on the BoE to raise interest rates, hitting shopper spending still further.

Retailers are also in danger as business rates are on the cusp of shooting higher. Real estate research firm Altus Group predicts business rates could soar to £1.95bn from next April.

On the plus side, LandSec’s London office estate could benefit from the steady unravelling of flexible working models. But this boost is likely to be overshadowed by the impact of Britain’s struggling economy on office space demand.

Fragile forecasts

The City expects payouts to continue rising steadily over the medium term. However, predicted annual rewards are covered just 1.3 times by anticipated earnings through the period, making these estimates look pretty weak.

Both figures are well below the widely regarded minimum security benchmark of 2 times. What’s more, the company’s weak balance sheet means it has little wiggle room to grow dividends as predicted if profits disappoint.

Net debt fell to £3.3bn as of March from £4.2bn a year earlier. This reflected the sale of £1.4bn worth of office space in the prior 12 months. But Land Securities net debt to EBITDA ratio still stood at an unhealthy 7 times.

LandSec’s sinking share price has driven dividend yields to eye-popping levels. But I believe the risks of adding it to my investment portfolio are too high. I’d rather buy other FTSE 100 stocks for passive income today.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc. 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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