Shares in Primary Health Properties (LSE:PHP) are largely flat after its latest results. But I think the FTSE 250 real estate investment trust’s (REIT) a bargain.
Rental income keeps growing, the outlook’s positive, and the dividend continues to rise. I think there’s an opportunity here investors should consider.
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Results
During the first half of 2024, Primary Health Properties increased its dividend per share from 3.35p to 3.45p. That’s a 3% increase, roughly in line with inflation during the period.
The company’s rental income also grew from £75.5m to £76.2m. This largely came from increasing rents, which is a positive sign, but investors should note that this only amounts to 1% growth.
Over the long term, it will be difficult for Primary Health Properties to grow its dividend faster than it can increase rents. So the slow rental growth is something to keep an eye on.
With a 6% starting yield, investors arguably don’t need much in the way of dividend growth to earn a good return. But the company has bigger ambitions.
NHS growth
With REITs that focus on specific sectors, growth prospects often come down the fortunes of the underlying industry. And for Primary Health Properties, that means the NHS.
The company sees the recent change in government as a positive sign. In particular, Secretary of State for Health and Social Care Wes Streeting’s plan to invest in GP surgeries should be encouraging.
The plan is to reduce pressure on hospitals. But this will mean a need for further community care centres as well as strong demand for existing ones.
Primary Health Properties sees this as a potential source of growth. And I think this is highly plausible over the medium term.
Dividend cover
In my view, the question investors need to ask themselves is how likely Primary Health Properties is to sustain its current dividend. And a dividend coverage ratio of 100% indicates a potential risk.
The company currently sends out all of its net income to shareholders. That means if profits drop – for whatever reason – the dividend may also have to go the same way.
Net income often isn’t the best metric to use for assessing REITs, though. This is because they often have high depreciation costs, which show up in the income statement but are not cash charges.
I therefore think the coverage ratio might be misleading. And the fact it is within the historically normal range for the company reinforces my thought that there isn’t a big problem here.
I’m buying
I own Primary Health Properties shares in my portfolio and I’m planning to keep buying. I think there’s a durable source of passive income here.
Right now the stock comes with a 6% dividend yield. From there, I don’t think it takes much in the way of growth for the stock to generate a good return.
With interest rates set to fall, I don’t think the opportunity will be around for long though. That’s why I’m looking to act now.
