UBS rates Rural Funds Group a buy, share price up 3.2%

Credit: Keith Weller

When a large investment bank rates something as a buy (or sell) it can impact the share price fairly significantly on the day of that coverage.

UBS is one of the world’s largest investment banks. It’s based in Switzerland with its headquarters in Zurich and Basel.

Today, UBS initiated coverage of Rural Funds Group (ASX: RFF) as a buy, with a share price target of $2.39. This doesn’t leave much room for growth with the share price currently trading at $2.22.

I can see why UBS believes that Rural Funds is a buy.

For those readers that don’t know, Rural Funds is a real estate investment trust (REIT) that invests in farmland property and then rents out that land to high quality tenants like Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

REITs could get a boost between now and the election next year if Labor wins. Bill Shorten’s party has announced plans to remove franking credit refunds, which slightly decreases the appeal of some high-yielding stocks like Telstra Corporation Ltd (ASX: TLS). REITs don’t generate franking credits, so their distribution yields are unaffected.

Rural Funds has a fairly appealing yield of 4.5% at the moment and management have a target of increasing the distribution by 4% each year.

I believe that Rural Funds is the best REIT on the ASX. It has a diverse selection of farm types including cattle, poultry, almonds, macadamias, cotton and vineyards.

The REIT is able to re-invest its earnings as its payout ratio of earnings is currently around 80% and it can improve the land value with its retained earnings.

Foolish takeaway

I think that Rural Funds is one of the best non-company options on the ASX. It’s trading quite significantly above its adjusted-NTA value, so it’s hard to say it’s good value today, but I’d be happy to make a small buy at today’s price for a good source of income.

This top dividend stock is generating much stronger growth than Rural Funds and is well worth a buy in my opinion.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED and Select Harvests Limited. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Telstra Limited. The Motley Fool Australia has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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