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Goldman Sachs tips Scentre Group shares as a buy for dividend seekers

Scentre Group (ASX: SCG) shares could be an excellent bet for dividend seekers if the analysts at Goldman Sachs are on the money. Scentre is the operator of the Westfield shopping centres in prime locations around major urban centres across Australia. 

Since its June 2014 spin-off from the international Westfield shopping centre group the stock has climbed around 21% which is not a great return, but once you add dividends that have grown from 20.65 cents per share in 2015 to 22 cents per share in 2019 the total return is far healthier.

Based on the forecast for 2019 returns of 22 cents per share the stock yields 5.6% and we can see from the modest dividend and share price growth that this stock is not going to shoot the lights out, but should provide steady returns to an income seeker in retirement for example. 

Importantly the valuation is reasonable given the way the ultra-low interest rate environment has jacked up the valuations and lowered the yields of other popular dividend shares such as Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD) or Goodman Group (ASX: GMG).

At $3.93 Scentre trades on 15.3x 2019’s annualised funds from operations and 14.8x Goldman Sach’s forecast for FY 2020’s funds from operations.

Evidently we can see that if Scentre is able to steadily grow funds from operations over the medium term income-seeking investors are likely to receive a respectable return in the context of what’s available on cash deposits for example.

According to Goldman’s group also trades at around a 13% discount to its stated net tangible assets of $4.49 per share to provide investors with a further margin of safety today. 

“The performance gap between the best quality and most productive malls and all other retail assets is finally beginning to emerge, and is yet to be reflected in SCG’s pricing,” Goldman’s points out. 

The balance sheet is in a reasonable shape as REITs go, with funds from operations to debt at 11.3% and interest cover at 3.5x. 

As such if you’re comfortable the rise of online shopping will not swamp the likes of Westfield the stock could be a good option for conservative income seekers. 

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia has recommended Scentre Group. 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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