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In the dynamic field of real estate investment in the United Kingdom, Granulator (LSE:GRI) looks to be one of the heavyweight contenders. As one of Britain's leading landlords, the firm has carved out a sizeable niche for itself in the booming private rental sector. Scratch beneath the surface, however, and I find a company that looks more like a house to fix than a dream home for my portfolio. Let's look at why I think this UK stock could be one to avoid.
Back to unprofitability
The recent financial results sound like a warning. The company reported a loss of £0.03 per share for the first half of 2024, a stark turnaround from a profit of £0.006 for the same period in 2023. As the UK economy appears to be on the up, this isn’t just a minor stumble; it’s a full-blown crash.
The valuation doesn't inspire me either. Based on a discounted cash flow (DCF) calculation, the stock is already potentially overvalued by more than 93%. While many of the negatives might already be built into the share price, there could still be a long way down.
A dividend in difficulties
At first glance, the dividend yield of 2.85% may seem pretty decent. However, the all-important payout ratio, which shows how much profit is being distributed in the form of dividends, stands at a staggering -4.641%. In simple terms, the company is paying dividends it cannot afford. This is like splurging on a sumptuous dinner when the bank account is already overdrawn.
Management increased the first-half dividend to £0.025 per share. To me, however, this move looks less like confident generosity and more like a rearrangement of the deck chairs on the Titanic.
The company's balance sheet is suffering from the weight of its £1.5bn debt. With a debt-to-equity ratio of 84%, the company is highly leveraged. In a time of volatile interest rates and general uncertainty, this situation is not only worrying, but potentially catastrophic.
Not everything is bad
Despite these warning signs, some analysts remain fairly optimistic about the company's future. Annual profit growth is forecast to be around 70% over the next five years, significantly higher than the wider UK market's growth of around 14%. The company also expects to return to profit next year.
Management is very experienced and seems to be investing in the stock again. This seems like a good sign, but it may not have any bearing on performance.
So while Grainger's focus on the private rental sector may look like a safe bet in Britain's cash-starved property market, the balance sheet suggests it is more lead than gold. The combination of losses, unsustainable dividends and debt creates a perfect storm of investment risk.
As Foolish investors, we are always on the hunt for companies with strong financials, sustainable dividends, and clear growth prospects. Unfortunately, Grainger ticks none of these boxes for me. While it is possible that the company will undergo a turnaround, I am not betting on the fortunes changing anytime soon.
Remember, in the investment world, sometimes the best deals are the ones we pass up. In the case of Grainger, this fool is not just walking away, he's running away.
