Today, I’m considering the value proposition of a real estate investment trust (REIT) on the FTSE 250. It has a high dividend yield and has performed well recently, but does it have long-term potential as an income stock?
One key advantage of REITs is that they must pay out at least 90% of their profits as dividends. This makes them more reliable than other dividend stocks. But on the downside, they’re very reliant on the housing market doing well.
If the economy turns south and earnings decline, dividend payments could take a hit. So there’s a very defined risk/reward element to this type of investment.
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Checking the stats
Assura (LSE: AGR) is a REIT that specialises in healthcare premises. It had a bad start to the year with the share price falling 12% since January. However, in the past month, it’s shot up 5.2%. What’s more, it has a very attractive 7.8% dividend yield. So I decided to see if it’s a worthwhile investment.
The first thing I checked was its dividend track record. It started paying dividends in 2004 but things didn’t go so well at first. Payments were suspended in 2009 and reinstated in 2011, only to be cut again in 2012.
However, the past 10 years have been a bit better. Since 2013, dividend payments have been consistent and steadily increased from 1.16p to 3.28p. That equates to an annualised growth rate of 7.16%. If it can keep that up, shareholders could earn some decent returns from the stock.
But does it have long-term potential?
Dividends are a fickle beast — one moment they’re there, the next, they’re gone. If a company starts losing money, dividend payments are usually the first to go. So when choosing a stock for dividends, there are a few things to check.
First, is the company managing its debt appropriately? With £1.25bn in debt and £1.47bn in equity, its debt-to-equity ratio is an acceptable 84.6%. That’s okay for now, but it’s been increasing for the past year. It if gets any closer to 100%, that would be cause for concern.
Second, let’s check its income statement. In the latest FY 2023 earnings report, revenue exceeded analyst expectations by 2.2%. Not bad, but wait. Earnings per share (EPS) missed expectations, falling to a 1p loss per share. When it comes to dividends, negative EPS is not ideal. For now, cash flows sufficiently cover dividend payments – but only just. That’s another thing to keep an eye on.
Third, is the valuation. Assura has a rather high price-to-sales (P/S) ratio of 8, although it’s not much higher than the peer average of 7. Using a discounted cash flow model, analysts estimate the shares to be undervalued by 21.6%. That’s not bad but not particularly promising either.
My verdict
Overall, there isn’t much to suggest any significant price growth for Assura in the short term. The value’s entirely in the dividends, which should remain stable for now. The UK housing market’s done well this year, with Savills expecting prices to rise a further 2.5%.
For investors looking to increase their exposure to real estate, I think Assura would make a good one to consider for a dividend portfolio. However, as someone with less confidence in the housing market, it’s not a stock I’d buy right now.
