If there’s one thing Neil Woodford is known for, it’s his ability to suss out brilliant income stocks that fly under the radar of many retail investors. One such firm that’s caught the attention of Woodford and myself is real estate investment trust (REIT) Hansteen Holdings (LSE: HSTN).
As a REIT, the company must pay out 90% of its rental income as dividends, for which the company is given highly beneficial tax status. At present this dividend yields 4.09% annually.
Now, there are plenty of other property firms out there that also pay substantial dividends but a few things about Hansteen in particular have excited my interest. The first is that the firm’s co-founders are still joint CEOs and have proven adept at riding out the cyclical nature of the property sector with aplomb since founding the firm in 2005 and its predecessor in 1989.
This long experience in the industry lends the pair the trust of investors when they make ambitious calls, such as the recent sale of the entirety of the firm’s Dutch and German assets for €1.28bn to concentrate on its UK portfolio. Management decided that with occupancy and rent rates high, this was a good time to realise its investment and return a great deal of the proceeds to shareholders.
This return will take place through a £580m tender offer, whereby shareholders can sell up to one in two of their shares back to the company at 140p each. The rest of the proceeds will be used to pay down debt and provide the capital for further asset purchases in the UK.
As management sees UK property prices as elevated, these purchases will probably be small bolt-on acquisitions to its already sizeable portfolio of industrial properties. The value of these properties has risen nicely in recent years due to increased demand for e-commerce-related storage and shipping facilities, so valuation uplift potential looks solid, even with Brexit looming over other parts of the property sector.
With an already impressive dividend yield set to increase as the company buys back shares, I reckon Hansteen could be an interesting choice for yield-starved investors.
Building growth from the ground up
Another Woodford holding on my radar is flooring distributor Headlam Group (LSE: HEAD). The company’s stock currently offers investors a 3.94% yielding dividend that has been growing steadily in recent years.
Growing dividends have been fuelled by rising earnings due to both organic growth and bolt-on acquisitions. In the half year to June, like-for-like sales (LFL) rose 2.1% in the UK and 3% in Europe, while overall group growth was 4% thanks to two bolt-on acquisitions and the weak pound.
Looking forward, there is still plenty of expansion potential as it moves into new territories in the UK and Europe, which currently accounts for only 14.1% of the group’s £340m of H1 sales. Also attractive is the company’s rising cash flow as the benefits of scale increase margins. In H1, operations generated £17.1m in cash that helped boost its net cash position to £49.8m.
With lots of cash on hand, rising margins and impressive growth potential I reckon Headlam may prove an attractive income and growth option in the coming years.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Hansteen Holdings. 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.