In the dynamic arena of UK real estate investments, Grainger (LSE:GRI) looks to be one of the heavyweight contenders. As one of Britain’s leading residential landlords, the firm has carved out a sizeable niche in the burgeoning private rental sector. However, scratch beneath the surface, and I find a company that feels more of a fixer-upper than a dream home for my portfolio. Let’s dissect why I think this UK stock might be one to avoid.
Back to unprofitable
Recent financial performance reads like a cautionary tale. The company reported a loss of £0.03 per share in the first half of 2024, a stark reversal from the £0.006 profit in the same period of 2023. As the UK economy looks to be on the rise, this isn’t just a minor stumble; it’s a face-first tumble.
The valuation doesn’t inspire me either. From a discounted cash flow (DCF) calculation, the shares are already potentially more than 93% overvalued. Although a lot of the negatives might already be baked into the share price, there could still be a long way down.
A struggling dividend
At first glance, the dividend yield of 2.85% might seem fairly decent. However, the all-important payout ratio, showing how much profit is paid out as dividends, stands at a staggering -4,641%. In layman’s terms, the firm is potentially paying out dividends it can’t afford. This feels akin to splashing out on a lavish dinner when your bank account is already overdrawn.
Management increased the first-half dividend to £0.025 per share. However, to me, this move seems less like confident generosity and more like rearranging deck chairs on the Titanic.
The firm’s balance sheet is groaning under the weight of its £1.5bn debt burden. With a debt-to-equity ratio of 84%, the company is leveraged to the hilt. In an era of volatile interest rates and general uncertainty, this setup isn’t just concerning; it’s potentially catastrophic.
Not all bad
Despite these red flags, some analysts remain fairly optimistic about the firm’s future. Annual earnings growth is forecast to be around 70% for the next five years. This is notably ahead of the wider UK market at about 14%. The company also expects to return to profits next year.
Management is highly experienced, and appears to be investing in the shares again. This feels like a fairly good sign, but could be entirely unrelated to performance.
So while Grainger’s focus on the private rental sector might seem like a golden ticket in Britain’s housing-starved market, the balance sheet suggests it’s more lead than gold. The combination of losses, unsustainable dividends, and debt creates a perfect storm of investment risk.
As Foolish investors, we’re always on the hunt for companies with robust financials, sustainable dividends, and clear growth prospects. Unfortunately, Grainger ticks none of these boxes for me. While the business may well stage a dramatic turnaround, I’m not betting on such a reversal of fortunes any time soon.
Remember, in the world of investing, sometimes the best deals are the ones we walk away from. In the case of Grainger, this Fool is not just walking away – I’m running for the hills.
This post was originally published on Motley Fool
