As investors continue to monitor the economy and their favourite securities, the opportunities available for investment seem to be fewer and fewer as the names making the news seem to be hitting new highs. In other cases, the bottom seems to be falling out, which reminds me of that famous expression: “I wouldn’t touch that with a 10-foot pole!”
In line with this expression, the name that is “top of mind” is none other than Valeant Pharmaceuticals, which has changed its name to Bausch Health Companies Inc. In order to avoid situations such as these, investors can take a few easy steps by avoiding the pharmaceutical sector altogether and instead choose to look at companies in the real estate sector.
As most real estate investment trusts (REITs) have a high amount of tangible book value, investors will have the benefit of the worth attached to these names in addition to the cash flows generated by these assets. In spite of historically low returns, investors can now appreciate how the increase in interest rates has translated to lower share prices for many names in the sector. Essentially, the higher risk-free rate of return has made existing dividend yields less attractive, which has led to a correction in the share price in many cases.
With such wonderful opportunities now available, investors have the chance to purchase low-risk names amid a challenging investment environment.
One of the most undervalued and undercovered names is none other than Melcor Developments Ltd. (TSX: MRD), which offers a dividend yield of more than 3.5% and carries tangible book value far in excess of the price per share. What makes this name so attractive is the dividend yield, which is supported by the division that owns and leases out office buildings (and operates golf courses).
As the company operates in Alberta, the large sell-off from a few years ago was a function of lower oil prices and what many thought would be lower land values. As a reminder, land is held on the balance sheet at cost and not at market value, potentially leading to major profits down the road. As another reminder, this company owns a lot of land!
The second name is Slate Office REIT (TSX:SOT.UN), which, at a price of less than $8, offers investors a yield that is in excess of 9.5%; many feel the yield is in danger of being cut. What investors fail to realize, however, is that a dividend cut (in half) would lead to a yield of almost 5% and a lot of capital appreciation. Essentially, this name trades at a large discount to tangible book value, because management raised a little too much money to expand the business.
The good news, however, is that there is a share buyback currently underway, which will reduce the payout ratio and hopefully attract some positive momentum for long-term investors.
