Investing in Swiss real estate companies: a good idea for the dividend-oriented investor?

Among the Swiss companies with the highest dividend yields, real estate companies - active in the management (purchase/sale, rental) of commercial, residential and/or industrial properties - are in a good position. Indeed, the average yield of the six most highly capitalized real estate companies is currently 4,80%, which is well above the yield of the SMI leaders such as Nestlé (3,14%), Novartis (3,21%) or Roche (2,95%). Furthermore, while the SMI prices soared by an average of 20% during 2013, there was an average fall of 9% for the six companies in question. Although lower than the yield posted by some Real Estate Investment Trusts (REITs) in the USA, such as Omega Healthcare Investors Inc. (OHI) and its current 6.4%, the yield of Swiss real estate companies is enough to make your mouth water. This article will attempt to assess the interest of these companies for the investor basing his approach on dividends and their growth.

The six real estate companies in question, their capitalization, and the amounts of dividends paid for the fiscal years 2002 to 2012 (taken from finanzen.ch) are shown in the following table:      

Note that most companies have a limited dividend history and some have a tendency to pay dividends of a consistent amount year after year. In the remainder of the article, companies are compared on some of their financial fundamentals as well as dividend ratios.

Price volatility (beta), profitability and debts

The stocks all have lower volatility than the market (Figure 1), constituting defensive stocks. On average, the beta is 0.33.

Figure 1. Price volatility (beta index).

On the other hand, disparities appear in the ability of companies to create value as indicated by their return on equity (ROE) ratio (Figure 2). Specifically, PSP, SPS and IS display returns almost twice those of MOB, ALL and WAR.

Figure 2. Return on equity (ROE).

All six companies have taken out loans to finance their activities (Figure 3). However, PSP has a much lower debt-to-equity ratio than the other five companies. It is worth noting that none of the companies appear to be excessively indebted.

Figure 3. Rdebt/equity ratio (total debt/total equity).

Dividends

The dividend yield (Figure 4) is roughly between 4% and 6%, with the highest yield currently being offered by IS.

Figure 4. Dividend yield.

Payout ratios, which are a condition for dividend sustainability, vary widely (Figure 5). Indeed, while PSP only pays out 40% of its profits, ALL paid out the equivalent of 188% for the 2012 financial year. Needless to say, such a dividend is in danger of being reduced. The other company with a high payout ratio, WAR, may not be able to increase the amount of future dividends. However, earnings growth could allow for an increase in future dividends.

Figure 5. Payout ratio.

The valuation

In order to assess the valuation of the six companies, two ratios were used. On the one hand, the price-earnings ratio (PE) (Figure 6) and on the other hand, the comparison of the book value to the share price (Figure 7). WAR is, according to both indicators, overvalued. On the contrary, PSP would be undervalued by around 8% if we stick to its book value and the company is comparatively the cheapest according to the price-earnings ratio. IS has a price-earnings ratio below average, but an overvaluation of almost 29% according to its book value.

  Figure 6. Price-earnings ratio (PE).

Figure 7. Difference (expressed in %) between book value per share and share price.

 Conclusion

Overall, the results are rather disappointing for the dividend-oriented investor: despite a relatively high yield, it seems that these companies are not able or do not aim to pay growing dividends. Dividends are (at best) constant, otherwise their amount is quite fluctuating, their payment interrupted or their history short. For example, although IS has been paying a dividend without fail since 2003, the amount of this dividend increased at first, then it was reduced and finally it has been constant since 2007. Despite this, the yield of 5.97% and the modest price-earnings ratio make IS the company that is, in my opinion, the best current option. Beware, however, of overvaluation according to book value.

PSP could prove to be an interesting stock for the value investor. Indeed, the company has good fundamentals (return on equity and debt) and the most attractive valuation among the six companies analyzed. If the payment of a dividend were to continue (first payment relating to the 2011 financial year), then this would be an additional positive point. On the page investor relations, it is written on this subject: "PSP Swiss Property SA plans an annual distribution of at least 70% of the consolidated profit of the financial year excluding results from buildings. PSP Swiss Property aims to guarantee a sustainable evolution of dividends (...)."

The profits of these companies are of course dependent on interest rate fluctuations. It could therefore be wise to position oneself on such securities during a period of increasing rates, given that this will lower prices. Finally, there are many real estate funds that offer regular returns and possibly preferable alternatives to the securities of the real estate companies analyzed in this article.