Are there many riskier dividend shares out there than Hammerson (LSE: HMSO)?
A tough retail environment certainly provides the property trust with some big challenges to overcome. However, there are still many investors who are desperately hanging on in there. A monster 10% dividend yield at current prices has led to plenty of people buying in on hopes of brilliant income flows, too.
Full-year results are scheduled for release on Tuesday, 25 February, and I fear there could be plenty of pain coming down the line. I reckon this is a shrewd time for existing investors to sell out.
FTSE 250 business Hammerson certainly spooked investors last time out in August. Back then it said that like-for-like net rental incomes (or NRIs) had slipped 0.1% between July and December. Meanwhile, net asset value per share had ducked 7.2% year on year because of low transaction values and weak retail conditions, it said.
The performance of its flagship retail sites was particularly bad in the period. Underlying NRIs here tanked 6.8% in the first half of 2019, Hammerson said. This was caused by a rising number of retailers moving into administration or agreeing to company voluntary arrangements.
And recent studies suggest that conditions hadn’t improved for Hammerson during the final half of last year. For example, the number of retailers experiencing “significant distress” in the final quarter rose 2% year on year to 31,615, according to insolvency specialist Begbies Traynor.
It’s not as if Hammerson’s share price hasn’t been heading southwards already, though.
The ‘Boris Bounce’ that has boosted many parts of the UK economy following mid-December’s general election has clearly not filtered through to the retail sector. A string of negative industry surveys provide clear evidence of this. This is why Hammerson’s share price has already plummeted 27% since the beginning of January.
Such weakness leaves the business looking cheap from a paper perspective. Right now it carries a forward price-to-earnings (P/E) ratio of 9.2 times. The term ‘bargain basement’ covers any reading of 10 times and below.
But there’s a reason why Hammerson is looking so unloved. It’s not just the threat of some awful financials in the coming sessions. It’s the probability that political and economic uncertainty – the reasons why consumer confidence remains at rock bottom – will persist through 2020 and possibly beyond, too.
City analysts expect profits to continue falling at the London firm. They expect it to follow an anticipated 9% bottom-line slide in 2019 with an even-worse 11% decline this year.
Will dividends disappoint?
No wonder they expect it to start cutting dividends, then. Sceptics could suggest, though, that Hammerson might cut rewards even more sharply than the number crunchers predict. First off, that 10%-yielding predicted dividend for 2020 is barely covered by anticipated earnings.
And while the property giant’s been frantically disposing of assets of late, big question marks remain over its balance sheet and thus its ability to keep doling out massive dividends. Its net debt to EBITDA ratio stood at a shocking 10.2 times as of June.
Why take a chance by holding Hammerson stock today? There’s a wide choice of better big-yielding blue chips to buy right now, in my opinion. The possibility of extra share price pain and disappointing dividends make this one company that’s really best avoided.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.