Is Cromwell Group's 7.5% yield too good to ignore?

Highly-geared property manager Cromwell Group (ASX:CMW) isn't for everyone, but definitely deserves consideration for its earnings power.

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Cromwell Group (ASX: CMW) was actually my Top Stock Pick recommendation for August 2014 thanks to its quality portfolio and prospects for expansion.

Despite the share price falling marginally since then, the company returned very strong results with net profit growing 43%, largely as a result of acquisitions since the rental market remains quite soft.

Management believes that the outlook for Cromwell in future years is positive thanks to a long average weighted lease term of 6.1 years, portfolio occupancy of 98%, and 82.9% of those tenants composed of Government entities or listed public companies/subsidiaries.

Broadly speaking, in future years Cromwell plans to reduce gearing, grow net tangible assets per security and increase funds management activities which at present contribute very little to earnings.

This is all well and good, however in addition to growth plans and quarterly dividends amounting to 7.5% annually, investors need to consider the risks associated with a Cromwell investment.

First, Cromwell pays out in the vicinity of 90-95% of earnings, retaining very little 'cushion'. This could make earnings vulnerable to property market shocks given the current high levels of gearing and occupancy.

Second, the national property market is quite weak with excess capacity in a number of regions, and Cromwell could face some stiff competition in future years thanks to vacancies or slower rent increases for tenants.

Third, a good portion of the portfolio is coming up for review in the next few years, which combined with point #2 could create some difficulties around retaining tenants and growing earnings organically.

Investors can breathe easier though knowing that Cromwell's directors own around 32 million securities between them. However, this unfortunately only guarantees their best efforts and not immunity to wider market conditions.

While there is a lot to like about Cromwell, despite the reduction of gearing it is still suitable only for more risk-tolerant investors.

Investors after other high-yielding stock ideas can check out my recent article on the subject, or read on for The Motley Fool's free report on their Top Dividend Stock for 2014-2015.

Motley Fool contributor Sean O'Neill doesn't own shares in any companies mentioned in this article.

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