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In the volatile UK housing market, Grainger (LSE:GRI) looks to be one of the heavyweights. As one of Britain's leading landlords, the company has carved out a niche for itself in the growing independent rental industry. However, underwrite, and I find a company that feels much better than a dream home for my portfolio. Let's break down why I think this UK stock may be one to avoid.
After no profit
Recent financial performance reads as a warning. The company reported a loss of £0.03 per share for the first quarter of 2024, a significant change from the £0.006 profit in the same period of 2023. As the UK economy looks to be growing, this is no small feat. stumble; it's falling face first.
Estimating doesn't motivate me either. From a discounted cash flow (DCF) calculation, the stock is already over 93% leveraged. While many negative factors may already be factored into the share price, there may still be a long way to go.
A difficult assignment
At first glance, a dividend yield of 2.85% may seem modest. However, the most important payout ratio, which shows how much profit is paid out as dividends, stands at 4,641%. According to ordinary people, the company may pay dividends that it cannot pay. This sounds like splurging on a fancy dinner when your bank account is already overdrawn.
Management increased to 0.025 € per share for the first half. However, to me, this move looks less like confident generosity and more like rearranging the deck chairs on the Titanic.
The company's balance sheet is groaning under the weight of its £1.5bn debt. With a debt-to-equity ratio of 84%, the company broke even. In an era of volatile interest rates and general uncertainty, this setup is not only relevant; it could be a disaster.
It's not all bad
Despite these red flags, some analysts remain optimistic about the company's future. Annual income growth is predicted to be 70% over the next five years. This is ahead of the wider UK market by around 14%. The company also expects to return to profit next year.
Management is very experienced, and seems to be invested in the stock as well. This sounds like a good sign, but it may not be practical at all.
So while Grainger's focus on the private rental sector may seem like a golden ticket to Britain's starved market, the balance sheet suggests it's more profitable than gold. The combination of losses, unmeasured gains, and liabilities creates a perfect storm of investment risk.
As naive investors, we are always on the hunt for companies with strong financials, sustainable earnings, and clear growth prospects. Unfortunately, Grainger does not release any of the boxes for me. While the business may undergo a dramatic turnaround, I'm not betting on a similar recovery of fortunes anytime soon.
Remember, in the world of investing, sometimes the best deals are the ones we pass up. In Grainger's case, this Fool doesn't just walk away – I run for the hills.
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