The outlook for the UK economy is relatively uncertain. Higher inflation recorded in January could lead to lower consumer spending and difficulties for retailers as well as the owners of shopping outlets. In the near term, their share prices could come under pressure. However, in some cases this is already expected and such companies offer wide margins of safety. Here are two shopping centre owners which could be worth buying, not least because they have upbeat income prospects in 2017 and beyond.
Intu Properties (LSE: INTU) operates a number of shopping centres in the UK, and also has some exposure to Spain. However, the UK is its main market and its fortunes are therefore closely linked to the outcome of Brexit. If inflation continues to rise then it would be unsurprising for its profitability to come under a degree of pressure in the short run. That’s because disposable incomes would be likely to fall in such a scenario, and Intu’s tenants may see their profitability do likewise.
However, since the company’s shares are currently trading on a price-to-book (P/B) ratio of 0.73. This indicates that they may hold up well even if the UK retail sector experiences a lacklustre period. Furthermore, the company is forecast to record a rise in its bottom line of 1% this year and 4% next year. While some way behind the growth outlook for the wider index, this indicates that Intu continues to perform well on a relative basis and could overcome economic challenges better than its sector peers.
In terms of its dividend prospects, Intu’s yield of 5.1% is around 1.4% higher than the FTSE 100’s yield. Dividend growth may be lacking in the short run due to slow rent growth, but over the long run its international expansion potential could act as a positive catalyst on shareholder payouts.
Diversified income stream
While Intu focuses mainly on the UK, real estate investment trust (REIT) Hammerson (LSE: HMSO) is geographically diversified. It operates across Europe and this could help it to better cope with the potential fallout from Brexit. In fact, it could mean that the company is able to benefit from weaker sterling, since it is likely to receive a positive foreign currency impact from its earnings derived outside of the UK.
With Hammerson yielding 4.5% from a dividend which is covered 1.2 times by profit, it seems to offer sound long-term dividend prospects. For a REIT, a dividend coverage ratio of 1.2 indicates there is room for growth in shareholder payouts at a faster rate than profit. Furthermore, Hammerson’s low capital commitments mean that more cash could potentially be paid out to investors. And with its earnings due to rise by 6% this year and 3% next year, its future income return is likely to be high. That’s the case even on a real-terms basis, which could make Hammerson a sound option for investors concerned about a rapidly rising price level.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.