After the general election last month, shares in British Land (LSE: BLND), one of the largest real estate investment trusts in the UK, surged as investors rushed to take advantage of a rare opportunity.
For much of the past 12 months, shares in this real estate investment trust have been trading at a deep discount to its underlying net asset value due to political and economic uncertainty. At one point, the discount was more than 40%.
However, as uncertainty has started to dissipate, the market has re-rated the stock. It is up around 35% since its 2019 low of 468p printed back in the middle of August.
But despite this impressive rally, shares in British Land still look undervalued. Indeed, at the time of writing, the stock is trading at a price-to-book ratio of only 0.76, implying there’s a further upside of 32% from current levels before the stock reaches fair value.
Unfortunately, there’s no guarantee that shares in British Land will reach this level. That said, in the past, the stock has traded at a premium to net asset value, so I think it is highly likely that the company will trade back up to book value at some point.
In the meantime, investors can look forward to a dividend yield of 5%. As a real estate investment trust, British Land has to distribute the majority of its rental income to shareholders every year to maintain its favourable tax status. Management can also top up the rental income distribution with capital gains on property development. This means that British Land is a highly reliable income stock.
It is this combination of capital growth potential coupled with British Land’s 5% dividend yield that makes me think this stock could be a great addition to a portfolio in 2020.
I think it could also be worth keeping an eye on general insurer RSA Insurance (LSE: RSA) this year. It is one of the largest insurance companies in the UK, offering everything from home insurance to business insurance through its direct-to-customer brands. The group also has a presence in Scandinavia and Canada, giving it diversification away from its home market here in the UK.
Several years ago, RSA ran into some problems, which forced the business into a loss and cost the previous management team their jobs. Former RBS CEO Stephen Hester was parachuted into the top position to take control, and he has done a fantastic job since then. City analysts are expecting the group to report a net profit of £430m this year, up 24% from 2018. On this basis, the stock is trading at a forward P/E of 13.9, falling to 12.1 for fiscal 2020.
As well as the attractive valuation and growth potential, the stock also supports a dividend yield of 4.2%, rising to 5% for fiscal 2020 according to current projections. Dividend cover of 1.7 tells me that this payout is exceptionally safe for the time being.
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Rupert Hargreaves owns shares in British Land Co. The Motley Fool UK has recommended British Land Co. 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.