I buy those blue chip stocks that yield 6%+

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Everyone has their own definition of a blue chip security.

Some investors classify companies as blue chips simply based on their size. Others only look at their background. And some only consider the risk of the underlying business.

My definition of a best-in-class stock is one that exhibits some of the following characteristics:

  • The company is large and well established.
  • He has a solid track record.
  • Its activity is defensive.
  • He has a healthy track record.
  • It pays a constantly increasing dividend.
  • And it enjoys good growth prospects.

Simply put, a blue chip is a high quality business that has performed well in the past and should continue to deliver strong results over the long term.

Good examples would include companies like Walmart (WMT) or Procter & Gamble (PG).

Typically, these companies trade at high valuations and low yields because they are in high demand among investors.

But following the recent market decline, a few blue chip dividend stocks have become exceptionally cheap and are now offering yields above 6% in some cases. Such opportunities are particularly plentiful in the real estate sector as it is currently out of favor.

At High Yield Landlord we specialize in listed real estate investments, and we have rarely seen so many blue chips trading at such high valuations and in the following we highlight two opportunities that we are accumulating:

Residential real estate is generally considered a defensive investment because everyone needs a roof over their head whether the economy is doing well or not. It’s also something you can’t easily replace with technology, and a well-located property has always gained in value over the long term.

For this reason, residential properties typically sell at low cap rates, and the Real Estate Investment Trusts (“REITs”) that own them also at low yield prices.

Some popular names in the US include Mid-America (MAA), Equity Residential (EQR), and Independence Realty (IRT). They all have a yield of around 2-3%.

Central American Apartment Community

central America

But one of these companies is currently earning 6.5%, and against all odds, it’s actually one of the largest and most respected companies in this space:

Vonovia.

Vonovia is Europe’s largest landlord, with a portfolio of around €100 billion of properties, mostly located in Germany.

The company has all the characteristics of a blue chip:

  • He is tall.
  • He has a solid track record.
  • Its activity is defensive.
  • He has a healthy track record.
  • It pays a constantly increasing dividend.
  • And it enjoys good growth prospects.

But despite this, the company’s share price has crashed over the past year, dropping 50%, and as a result, its price is now at an exceptionally low valuation.

Chart
VONOI given by Y-Charts

Historically, Vonovia has been valued at a small premium to NAV and a low yield of 2-3% most of the time.

But currently, its price is discounted by 55% from the value of its assets and it pays a dividend yield of 6.5% – which is the lowest valuation in the company’s history.

The market priced it at such an exceptionally low valuation on fears that rising interest rates and the energy crisis in Germany could significantly hurt its business.

But we just don’t see it.

Sure, these are important short-term issues, but their long-term implications aren’t really important.

Vonovia has a strong BBB+ rated balance sheet with an LTV of 43% and well-laddered debt maturities. Only about 10% of its debt matures each year, and Vonovia has enough liquidity through its retained earnings (73% payout ratio) and its recurring asset sales program to repay debt maturing. deadline. Furthermore, interest rates only increase due to high inflation, which also increases Vonovia’s rental income and the value of its assets. In the first half of the year, the company’s funds from operations (“FFO”) per share rose another 5.5% and reached new all-time highs.

The energy crisis may seem even scarier, especially for US-based investors who lack grounding. But having lived in Germany for years, I’m not so worried.

What most investors seem to ignore is that tenants are responsible for paying energy bills. The direct impact on Vonovia is therefore not that significant. Sure, that may limit its ability to push for short-term rent increases since tenants can’t afford much, but it won’t suddenly kill Vonovia’s profitability as its stock price suggests. Vonovia’s properties are also more energy efficient than average, and its rents are affordable and below market, which should provide an extra margin of safety.

Finally, rent arrears were very low even at the worst of the pandemic. Germans are more conservative with their finances, have better savings, less credit, and are less likely to skip rent payments than in the United States. It’s also a cultural thing.

So this is at most a temporary crisis that will harm Vonovia’s growth in the short term, but eventually things will work out and its long-term prospects will not be affected.

Now you have the opportunity of a lifetime to buy Europe’s largest and bluest owner at a hugely reduced valuation. We buy it hand in hand at High Yield Landlord.

Another Blue-Chip: STORE Capital Corporation (STOR)

Historically, Berkshire Hathaway’s (BRK.A, BRK.B) largest REIT investment has been a REIT called STORE Capital. Apparently, Warren Buffett himself made the investment years ago.

In case you are unfamiliar with STOR, it is one of the leading net rental REITs. It primarily owns service-oriented single-tenant properties, such as KFC (YUM) fast food restaurants, car washes, pharmacies, and other recession-proof and e-commerce properties:

KFC |  Net Lease Advisor

Net Lease Advisor

STOR generates stable rental income from leases over 15 years with no landlord liability and the company’s cash flow increases thanks to contractual rent increases and new real estate acquisitions, which are being made with significant spreads on its cost of capital. It is generally considered a blue-chip as it has a strong BBB-rated balance sheet and one of the best track records and reputations in its industry.

But recently, Berkshire decided to exit its stake in STORE, which caused its share price to underperform. Many investors took this as a red flag, thinking that if Berkshire exits, then maybe they should exit as well.

Chart
STOR given by Y-Charts

But the reality is that STORE was a rather small holding for Berkshire and it seems they invested mostly through the company’s former CEO, Chris Volk. When he left, they decided to sell too. It’s that simple.

So we don’t see it as a red flag.

On the contrary, we see it as an opportunity to buy more shares at a historically low valuation. Basically, STORE is doing better than average with record cash generation and dividend payouts.

It is expected to increase its AFFO per share by around 10% in 2022, which is well above its historical average, and yet its current FFO multiple is well below its historical average at just 12x.

Its dividend yield is now also 6%, which is well above its historical average. The dividend is expected to grow by over 5% per year and is guaranteed with a low payout ratio of 74%.

We expect investors to earn a 12-15% annual return through yield and growth alone. And as investors outpace Berkshire’s recent decision to exit its position, we also expect STORE to revalue closer to 18x FFO, unlocking 50% upside for patient shareholders. 12x FFO is just too cheap for a blue-chip that is doing so well.

Conclusion

Vonovia and STORE Capital are two examples of blue chips in the listed real estate sector that are currently undervalued.

They’re doing better than ever, but their market sentiment took a hit in 2022. The last time these companies were this cheap was in early 2020 and we doubled our money the following year.

The best time to buy is when everyone seems to be selling. Today is no different.

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