With interest rates on the slide, consumer confidence could prove to be surprisingly strong in the medium to long term. Certainly, falling commodity prices and higher than acceptable levels of unemployment are unlikely to help individuals to spend more. However, with the RBA already cutting rates twice this year and apparently ready to do so again, the reduced cost of buying goods on credit could stimulate activity in the retail sector and aid the wider economy.
As such, operators of shopping centres and office buildings, such as Scentre Group Ltd (ASX: SCG) and Stockland Corporation Ltd (ASX: SGP) could be great places to invest. However, if you can only choose one or the other, which should it be?
Clearly, Scentre has been the better performer of the two companies since it was spun out of Westfield. Its shares are up by 23% since it listed in July 2014 and, looking ahead, its earnings growth potential is upbeat. In fact, Scentre is forecast to see its bottom line rise by around 3.6% from financial year 2015 to financial year 2016. And, while Scentre trades on a price to earnings (P/E) ratio of 25.4, which is considerably higher than the ASX's P/E ratio of 16.2, its price to book (P/B) ratio of 1.32 still holds appeal and is lower than the ASX's P/B ratio of 1.34.
Furthermore, Scentre also offers superb income potential, with its shares presently yielding 5.1% and being expected to raise dividends by 3.5% per annum during the next two years. That's more than twice the current rate of inflation and means that, even if a falling interest rate does stimulate the price level, Scentre Group is likely to offer a real-terms increase in income for its investors.
Meanwhile, Stockland is expected to increase its bottom line at an annualised rate of 7.9% during the next two years. And, unlike Scentre, it only trades at a slight premium to the ASX when it comes to the P/E ratio, with Stockland having a rating of 16.6. Moreover, with regard to its P/B ratio, Stockland appears to hold considerably more appeal than Scentre, with its P/B ratio standing at just 1.2 and indicating that an upward rerating could be on the cards.
Furthermore, Stockland has a yield of 5.6% and, while dividends are expected to rise by less than inflation over the next two years, Stockland's forward yield of 5.7% is still higher than Scentre's forward yield of 5.4%. As such, Stockland appears to not only be a better value stock, but offers the greater income, too.
Clearly, a falling interest rate would benefit both Scentre and Stockland's bottom lines and make their dividends more appealing to income-seeking investors. However, their share prices may respond positively, too, owing to relatively high betas of 1.45. This means that both stocks should see their share prices change by 1.45% for every 1% movement in the level of the ASX. As such, they both seem to be worth buying, although with a higher yield and a lower valuation, Stockland appears to be the preferred choice at the present time.
