I own a few income shares in my investment portfolio, but one in particular has been catching my eye lately. The stock has fallen 20% over the last 12 months, causing the dividend yield to reach 7%.
The company in question is Supermarket Income REIT (LSE:SUPR). The firm is a real estate investment trust (REIT) focused on retail properties, and I think it’s undervalued at the moment.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Trading at a discount
Over the last 12 months, shares in Supermarket Income REIT have been volatile. After a 30% fall between January and October, the stock has staged a 17% rally to reverse some of those losses.
The reason for the volatility is straightforward – interest rates. The stock fell steadily as the Bank of England increased rates, but things turned around as investors began to anticipate a cut in 2024.
Importantly, this means the stock hasn’t been moving as a result of specific features about the business. Its price has been shifting due to more general macroeconomic factors.
These do bear on intrinsic features of the business — Supermarket Income REIT could benefit from the chance to refinance its debts at lower prices. But this is true of a lot of companies.
EV charging
So if the share price mostly reflects expectations around interest rates, what has been going on with the underlying business? A couple of interesting things, in my view.
The company has just signed a deal with Osprey Charging to install rapid EV charging hubs across its portfolio of retail properties. This looks like a good and important move to me.
With EVs on the rise, people are going to be looking for places to charge their cars. And I suspect having charging points installed will make Supermarket Income REIT’s properties more desirable.
I’m optimistic that this should allow the company to keep increasing rents in the way that it has to date. That’s important for a business that can otherwise find growth a challenge.
Dividends
The stock has just gone ex-dividend with a payment of 1.515p per share coming in February. But the company has also made a move that I think is a good one.
Previously, Supermarket Income REIT had offered a scrip dividend – allowing investors to receive dividends in stock, rather than cash. With the stock down 20%, the board has suspended this.
I think this is a good move. One of the big risks with the stock is the rising share count, which has been growing at a pretty staggering rate over the last five years.
The longer this keeps going, the harder it becomes for the company to maintain its dividend per share. So I view the decision to stop distributing new shares while the price is low as a good one.
Risks and rewards
A falling share price and a rising dividend yield are signs that investors aren’t as keen on a stock as they once were. Sometimes, they’re right not to be.
In the case of Supermarket Income REIT, though, I see the decline as a buying opportunity. I’ll keep a close eye on that share count, but I’m looking to add to my investment with a 7% dividend yield.
