The ASX dividend stock Rural Funds Group (ASX: RFF) is down heavily from its peak. The Rural Funds share price has dropped 34% from the end of 2021.
If you don't know what this business is, it's a real estate investment trust (REIT) that owns a farmland portfolio across a number of different sectors including cattle, almonds, macadamias, vineyards and cropping.
Most of the ASX dividend stock's properties are located in Queensland and NSW, but it also has a few farms in Victoria, South Australia and Western Australia.
There are two main reasons why I think it's a great buy today.
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Lower share price
A share price does not tell us exactly how much a business is actually worth. It's the market giving a rough estimation – sometimes that guess is a long way off the real underlying value, sometimes it's too optimistic and sometimes too pessimistic.
In each report, Rural Funds tells the market what its adjusted net asset value (NAV) is – that's the value of the assets (including the farms) minus the liabilities (such as debt). The adjusted NAV recognises the value of the water entitlements at their market (sellable) value rather than the balance sheet value.
At the end of December 2023, the Rural Funds' adjusted NAV was $3.07, which was an increase of 4.8% for HY24 – the ASX dividend stock benefited from (independently) revalued assets, primarily in cattle and macadamia.
The current Rural Funds share price is at a 32% discount to that adjusted NAV. We'd only know what the true NAV is if Rural Funds decided to sell all of its properties, but I think there is a potential appealing discount here, particularly with potential interest rate cuts getting closer.
The lower Rural Funds share price has also led to a higher distribution yield. It is expecting to pay a distribution of 11.73 cents per unit in FY24, which is a forward yield of 5.6%.
Rental income growth
The current yield is one thing, but I'm also hoping it can return to distribution growth in the longer term.
There is a lot of rental growth built into its various contracts, with most having either a fixed annual rental increase, or inflation-linked increases, plus a market review.
Rural Funds also regularly invests in its farms to increase productivity, rental potential and capital value, which is good for investors.
While debt does cost more, the rental income growth can help offset this. Thankfully, a lot of Rural Funds' debt is hedged at an interest rate of less than 3% for the next couple of years.
With a weighted average lease expiry (WALE) of more than 12 years, the ASX dividend stock has a lot of rent already locked in.
