1 stellar Australian stock down 43% from all-time high to buy and hold forever

There are plenty of reasons to like this Australian stock.

| More on:
An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

The Australian stock Rural Funds Group (ASX: RFF) has fallen heavily, down 43% from January 2022. The real estate investment trust (REIT) looks like an excellent buy and hold investment forever, in my view.

The business owns various farms in different sectors around the country, including almonds, macadamias, cattle, and vineyards. I'd say farming is probably one of the most Australian business activities.

Farmland has been a useful asset for thousands of years, and I believe it will continue to be important for the rest of my lifetime. I think it's a great contender for being a listed business for decades to come.

But, its longevity is not what attracts me the most to this Australian stock. There are plenty of factors that appeal to me.

Large asset discount

I like buying businesses at a healthy discount based on their underlying value.

I've identified that the Rural Funds share price has fallen heavily since its all-time high peak in January 2022. That makes it an interesting investment consideration already, in my view.

Businesses like Rural Funds regularly tell investors what their underlying value is with the net asset value (NAV) figure. The number takes into account the value of farms, the loans, the cash, and other assets and liabilities.

The business reported that its NAV was $3.10 at 31 December 2024, so it's trading at a 42% discount to that number. That's a huge, appealing discount at a time when RBA rate cuts are happening and more seem to be on the way.

RBA rate cuts

The Reserve Bank of Australia (RBA) has already cut the cash rate two times this year, and there are expectations that the RBA could cut rates by a further three or four times over the next year, according to economists.

A rate cut could be very help for Rural Funds' finances for a number of different reasons.

A reduction in interest rates could mean lower debt costs and improved net rental profits for the business, which can lead to higher distributions.

The cuts by the RBA may also help the underlying value of the Australian stock by increasing the value of the properties.

Finally, rate cuts may help close the discount between the unit (share) price and the NAV per unit (of $3.10) if income investors are looking for income alternatives to term deposits and savings accounts.

Rental profit growth and the distribution

It's not just a one-off valuation discount that I'm attracted to.

The business has built-in rental growth because nearly all of its rental contracts with tenants either have a fixed annual increase or the rise is linked to inflation, plus occasional market reviews. This helps the rental income steadily tick higher and could help the distribution grow over the longer term.

With the business trading at such a large discount to its reported underlying value, it offers a pleasingly high distribution yield. It's expecting to pay a cash distribution of 11.73 cents in FY26, which translates into a forward distribution yield of 6.5%.

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Cheap Shares

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors in July

Here’s why these stocks look like bargains to me…

Read more »

Cheerful boyfriend showing mobile phone to girlfriend in dining room. They are spending leisure time together at home and planning their financial future.
Cheap Shares

This ASX dividend share could be the biggest bargain you can buy

This business is both really cheap and offers big dividends.

Read more »

A woman is excited as she reads the latest rumour on her phone.
Cheap Shares

3 popular ASX stocks that look dirt cheap right now

Let's see which shares analysts think are being undervalued by the market.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Cheap Shares

I think these 2 cheap ASX shares are buys for value investors

I think these stocks are too cheap to ignore.

Read more »

A man looks surprised as a woman whispers in his ear.
Cheap Shares

Recent dip buyers won big: 3 ASX shares that could repeat the feat

Analysts think these cheap shares could bounce back strongly.

Read more »

A man pulls a shocked expression with mouth wide open as he holds up his laptop.
Cheap Shares

2 ASX shares the market may be undervaluing right now

Bell Potter has good things to say about these cheap stocks.

Read more »

Happy work colleagues give each other a fist pump.
Cheap Shares

3 beaten-up ASX shares that could bounce back strongly

Analysts think these shares could bounce back with gains of ~40%+

Read more »

Couple looking at their phone surprised, symbolising a bargain buy.
Cheap Shares

Why I think this ASX small-cap stock is a bargain at $2.99

This small business looks like a big bargain to me.

Read more »