ii view: Segro in a shrinking pool of dividend paying shares

A fair dividend yield and e-commerce trends amplified by Covid-19 make the warehouse owner attractive.

Covid-19 trading update

• Paying the final dividend of 14.4p per share
• Rental income would have to fall by 80% to breach any debt covenants
• Cash and undrawn facilities of £1.2 billion
• Average debt maturity of just under 10 years

Chief executive David Sleath said: 

"Our primary focus is the health, safety and well-being of our employees, whilst working hard to support our customers and other business partners during this challenging period. The SEGRO team is operational, working at home, with full access to our central systems and communications network.

"Whilst current global events are unprecedented, we anticipate that the structural trends that have been driving occupier demand for high-quality, well located warehouse space will remain intact and may even be strengthened by the crisis, as the importance of logistics supply chains has been thrown into sharp focus in recent weeks.”

ii round-up:

Unlike shop and office owners British Land (LSE:BLND) and Land Securities (LSE:LAND), warehouse and industrial property owner Segro (LSE:SGRO) is planning to pay its latest dividend payment. 

Given a diverse selection of tenants, many of them supplying critical goods and services such as Sainsbury's (LSE:SBRY), Amazon.com (NASDAQ:AMZN) and Tesco (LSE:TSCO)-owned Booker, management believes it is “well placed to weather the storm caused by the Covid-19 pandemic.”

Subject to online AGM approval and as announced in its February full-year 209 results, a dividend per share of 14.4p will be paid on 1 May.

Trading prior to Covid-19 had been favourable with rent roll growth tracking ahead of expectations due to new lettings and pre-lets.

Some of its critical goods and services tenants are currently seeking additional space both for immediate occupation and to prepare for longer term growth post the corona crisis. 

Now with a bigger stock market value than FTSE 100 rivals British Land and Land Securities combined, Segro shares rose by nearly 2% in afternoon trading. A fall of around 15% year-to-date is significantly better than the 40% plus fall suffered by its rivals. 

For the approximate quarter of Segro tenants now suffering under Covid-19, management is on a case by case basis seeking appropriate relief measures.

In recent years Segro has been eyeing continental Europe. Management previously outlined its belief that e-commerce penetration in both France and Germany is now nearing the level at which retailers start to adapt their supply chains for an omni-channel delivery model.

ii view:

Segro is underpinned by the structural themes of e-commerce and urbanisation driving occupier demand. The combination of its prime portfolio and its active approach to asset management is enabling it to grow rents and maintain high occupancy levels across its markets. Covid-19, despite some tenant challenges, is underlining the importance of supply chains. 

For investors, the group’s dividend paying abilities, emanating from its flow of rental payments, arguably provides the key attraction - a dividend which is now defying Covid-19. A historic dividend yield of over 2.5% is not to be overlooked in a world where income is increasingly difficult to find.  

Potential growth in European e-commerce also offers attraction, although a current premium of the share price over its full-year Net Asset Value per share of 708p suggests the shares are not at bargain basement levels and already attempting to price in future prospects. 

Positives: 

• Diversity of both customer or tenant type and geographical location
• Unlike some REITs, still paying a dividend

Negatives:

• Some tenants suffering Covid-19 disruption
• Valuation: trades at a premium to NAV

The average rating of stock market analysts:

Strong hold