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It can be hard to spot genuinely undervalued stocks because some of the metrics are quite subjective. However, when considering an investment trust, it can be easier to see the relative value. Here’s one I saw that could be undervalued by up to 16%, with a generous yield for income investors.
A commercial property gem
The stock I’m referring to is Schroder Real Estate Investment Trust (LSE:SREI). It’s up 6% in the past year, with a current dividend yield of 6.6%.
As a REIT, it has a clear aim to provide shareholders with an attractive level of income. In order to keep the favourable perks of being a REIT, one is to pay out a certain amount of earnings as dividends to investors. It tries to do this through its primary source of income — the rent paid by tenants of its properties.
Its portfolio is focused on UK commercial property, such as offices, retail warehouses, and industrial estates. It focuses on acquiring new sites where it believes active asset management and sustainability upgrades can drive income growth and capital appreciation.
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Where the valuation gap comes in
The share price of the trust should (in theory) match the net asset value (NAV) of the properties. The total portfolio value of the properties is basically what the business is worth at any specific time. Yet based on the latest NAV information, the share price is 16% below this. There are a few reasons why this can happen.
The first is sentiment. If investors are uncertain about the trust’s prospects, they might sell the stock, even though the portfolio’s valuation hasn’t changed. Another factor is the daily movement in share prices. Yet the NAV updates are usually delivered each quarter. Therefore, when the next NAV update comes through, it could be higher or lower than the last one.
I do believe the gap is too wide here and, over time, it should move closer to zero. However, this is where long-term investing comes in. The stock could rally 16%, but it might take some years to happen.
Banking income in the meantime
While waiting, the regular income payments can act as a source of profit. At the moment, the dividend cover’s 1. This means the earnings per share fully cover the dividend. As a result, I don’t see any immediate concern that the dividend will be cut.
One risk is that it’s still uncertain how well commercial property will do. Some companies are pushing for a return to the office, but others are moving fully remote. This could impact demand.
Overall, I think the trust does offer good long-term value, along with above-average income payments. Therefore, it can be a stock for investors to consider.