The perfect solution for yield-starved investors

Yesterday was another grim day for markets, with tech tumbling for the third day in a row.

Apple lost 6%… each of the other FAANGs lost at least 3%… and Tesla even lost 21% in trading yesterday.

The misery spilled over to commodities, with crude oil prices plunging another 7%, the most since April.

But a little-noticed was another dip – a 3.7 basis-point decrease in the 10-year U.S. Treasury rate.

It’s now yielding 0.684 – down almost half from the 1.26 of March 2020 levels, which were already historically meager.

Here in Britain, rates have been slashed to 0.1% since March – also the lowest levels in history, and 80% lower than what the Bank of England allowed even in 2009.

If history is any guide, rates will stay that level in the U.K. for a good while. Remember, it took the bank of England until 2017 to finally raise rates from 2009’s nadir – and even then, it was just to 0.5%.

Dividends aren’t much of a solution either, with 445 LSE-listed companies having cut their payouts as of last month.

In a world where Imperial Brands and BP have slashed their dividends, while the FTSE is still down double-digits since March and rates are stuck at 0.1% for the foreseeable future, what are British investors to do?

A $145 million play by Warren Buffett last quarter could be the answer.

Do as Buffett does – not as he says

Warren Buffett’s $565 million stake in Barrack Gold got a lot of attention when it was revealed in filings last month, as Buffett has always been disdainful of gold as an investment.

But a smaller investment of his was far more interesting to me – an approximately $145 million investment in the real estate investment trust STORE Capital (STOR).

It’s a company that specializes in retail and hospitality industry properties. The acronym in its name stands for Single Tenant Operational Real Estate, because the firm deals with net-lease tenants signing long-term leases.

Crucially, these tenants are responsible for paying property taxes on their leases – while paying STOR rent that’s due before they can post a dime in profits, or pay a penny in dividends to their own shareholders.

In other words, STOR is first in line to get paid in retail – making it recession-resistant and almost immune to e-commerce competition.

The company therefore has the “moat” Buffett seeks in all his investments. But interestingly, while it doesn’t pay property taxes on its empire, it doesn’t pay taxes at the trust level, either.

In exchange for this tax emption, STOR – like the other 183 real estate investment trusts in America – must pay 90% of its net profits back to shareholders in the form of dividends.

This arrangement has allowed for a hefty yield on STOR – 5.5% as of today.

Buffett was probably tempted by the high yield, but I doubt it was the decisive factor. His main motive may have been value – STOR is beaten down at the moment, trading at a 35% discount to its pre-pandemic levels.

Whatever the reason, it’s clear Buffett can’t get enough of STOR. His new purchase of 18 million shares puts Berkshire’s ownership at 9.99% of the company – just under the 10% threshold that would trigger additional regulatory requirements.

But I don’t want to dwell too much on one play in one quarter. STOR is just part of a larger pattern of Buffett seeking income, as cheaply as he can find it.

Last summer, for example, he broke his acquisition dry spell by buying Dominion Energy – and with it, an income stream of several hundred million dollars a year for Berkshire.

That $200 – $300 million on a $9.7 billion investment amounts to an annual 2-3% yield – conservative, to be sure, but far above the average dividend yield and in a different solar system than the 0.1% interest rates the Bank of England has wrought these days.

It calls to mind Buffett’s “suck it up” advice on low interest rates, where he called reaching for yield, “very stupid, but very human.”

“People say, Well, I saved all my life, and I can only get 1%, what do I do?”

“You learn to live on 1%, unfortunately,” Buffett concluded in his February remarks.

But as you can see – Buffett isn’t content these days with 1% yields.

There’s no reason you should be either.

Regards,

William Dahl
Managing Editor, Southbank Investment Research

PS While Buffett’s move on STOR could be a value play, it’s possible it’s also a hedge on the 2020 election outcome. Joe Biden has pledged to repeal Trump’s corporate tax cuts – but he’ll be hard pressed to repeal tax cuts on companies like STOR that received no corporate tax rate cut to begin with. But repealing tax cuts are just the start of what COVID-era politicians are preparing to do, as Biden and his counterparts in Europe increasingly float the idea of new lockdowns. To see my colleague Nickolai Hubble’s research on what a looming second lockdown will mean for Britain and your money, click here.

Category: Market updates

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