Last year, the Reserve Bank cut interest rates from 4.25 per cent to 3 per cent, their lowest level since the global economic crisis.
For anyone with a mortgage, that was good news, except for that nice little margin the banks kept for themselves.
For income investors, it was crushing. Returns from their cash investments had fallen by a third. Forced back into equities, they pushed up the prices of stocks like Woolworths and Telstra. The value of these businesses didn’t change much over the year, but the returns on alternative investments to them, like cash, changed very much.
The choice was tricky: accept lower returns from cash and fixed interest, or take on more risk by increasing exposure to equities. With the recent market flourish, that risk has grown even greater. All stocks are more risky than cash but cash won’t protect you against inflation.
And there remain a few companies of a very high quality, offering a nice mix of distributions and acceptable capital growth over the long term.
As an addition to the riskier part of your income portfolio, these stocks have much to offer: an attractive income stream, resilient earnings and even a little growth should the economy improve. Compared with a term deposit, the extra returns more than justify the risks.
With a distribution yield of 6 per cent and the potential for that to grow, BWP Trust is an excellent antidote to low government bond yields and term deposit rates.
Originally spun out of Wesfarmers in 1998, BWP owns 73 bulky goods centres, mostly leased to Wesfarmers as Bunnings Warehouses, spread around Australia and valued at $1.4 billion in the trust’s latest accounts.
With 100 per cent occupancy and Bunnings generating 95 per cent of income, the trust is high quality. The reliance on a single tenant introduces a degree of risk, but if you’ve got to have one tenant, Bunnings would be one of the best.
Due to the range of relatively low-priced items in a typical trolley, it faces a minimal online threat. Like supermarkets, much of the value is in the distribution network. While some retailers are struggling, the Wesfarmers-backed Bunnings is still growing.
For the half-year ended 31 December, BWP Trust’s revenue rose 8 per cent to $54 million, delivering distributable earnings of $37.4 million, also up 8 per cent. An unfranked interim distribution of 7¢ a unit will be paid on 26 February.
Future returns should reach the high single digits with recent transactions illustrating the potential: BWP recently purchased a Bunnings Warehouse property at Gladstone on a starting yield of 8.8 per cent.
BWP also has low debt levels, with maturities between 2014 and 2017 and a net debt-to-total assets ratio of 23 per cent. Borrowing costs fell from 9.2 per cent to 8 per cent in the year to June 2012.
Wesfarmers owns the company that manages the trust, so there is the potential for conflicts of interest. The management fee runs at about 0.6 per cent of total assets, which is reasonable, but provides an incentive to grow in absolute rather than per security terms.
In fact management somewhat unnecessarily raised capital during the global financial crisis. There’s a risk of this happening again, although with low gearing and a high-quality portfolio, any dilution should be minimal. And management has at least shown discipline when making acquisitions.
Over the past nine years the average annual like-for-like rent increase has been 4.4 per cent. Site upgrades and further acquisitions should see rental increases somewhat higher than inflation – protection you won’t get from a term deposit.
BWP Trust is an excellent investment option for those seeking inflation-protected income without excessive risk. The current (unfranked) yield of 6 per cent beats term deposits hands down and capital growth should deliver at least another 3 per cent on top of that figure.
In this case at least, these returns are worth the additional risk.
This article contains general investment advice only (under AFSL 282288). Nathan Bell is the Research Director at Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au
BWP Price at posting:
$2.29 Sentiment: Buy Disclosure: Held
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