The broad pullback in the stock market is taking its toll on a number of Canada’s top stocks. Some of the carnage is warranted, and some of the selling looks a tad overdone.
Investors with a keen eye are starting to identify oversold stocks, and one name that is coming up on a regular basis is RioCan Real Estate Investment Trust (TSX:REI.UN).
Let’s take a look at the company to see if this is a good time to add it to your portfolio.
Profile
RioCan operates retail properties in the U.S. and Canada. Over the past six months the shares have dropped more than 15% as investors worry about rising interest rates south of the border and a weak Canadian economy. Rumblings are also in the air about the eventual demise of brick-and-mortar retailers.
All of these concerns are valid, but there seems to be a huge disconnect between the size of the threat and the extent of the sell-off in the stock.
Risk evaluation
Interest rates are likely headed higher in the U.S., and that will start to push up costs for debt-heavy companies like REITS. Investors should put the situation into perspective. The rate hike is likely to be very small and subsequent moves will be rolled out in a very cautious manner.
RioCan might actually sell its U.S. holdings to take advantage of the surge in the American dollar. If that happens, the company will have a cash windfall it can put towards paying down debt or investing in other areas.
In Canada, interest rates have actually dropped twice this year and it doesn’t look like things are headed the other way anytime soon. This is good for RioCan because it has 293 properties in Canada compared to just 47 in the United States.
The Canadian economy is in a mild recession and consumers might start to tighten their belts a bit, but the retail industry is very resilient, and most of RioCan’s top tenants are tier-one names.
The threat of online shopping is a long-term concern, but people have been predicting the death of brick-and-mortar retail for some time. Consumers still like to cruise the malls and enjoy an interactive shopping experience. It is a popular way to spend time with friends, and most people prefer to actually see the product in person before they buy it. Also, shopping online isn’t as much fun as ripping through the bargain racks looking for great deals. That is unlikely to change.
Cash flow strength
RioCan is putting up good numbers despite all the negative movements in the market. In the second quarter, the company delivered a 7% year-over-year gain in funds from operations.
RioCan also leased out 1.1 million square feet of space at an average rent increase of 9.8%. That sends the message that retailers are still keen to set up shop in prime locations.
Dividend safety
RioCan pays a distribution of $1.41 per share that yields about 5.8%. The payout should be very safe and investors might see a one-time special payout if RioCan sells its U.S. properties and decides it wants to kick back some of the gains to its owners.
Should you buy?
At this point, the downside risk looks limited. If you have a long-term outlook, this should be a good time to pick up RioCan at a very attractive price.
