Over the last 12 months, shares in FTSE 250 real estate investment trust (REIT) Primary Health Properties (LSE:PHP) have fallen by around 13%. As a result, the dividend yield has reached 6.5%.
With dividend stocks, a falling share price can be a sign investors think the distributions are at risk of being cut. So should I look to take advantage of the falling price, or think again?
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Interest rates
To my eye, it doesn’t look like much has been going wrong with the business specifically. The main source of investor concern appears to be the risk of higher interest rates.
This a potential issue for Primary Health Properties for two reasons. First, it means the company is likely to incur higher interest costs when the time comes to refinance its existing debts.
Even if rates come down, they’re a long way above the 3.2% the firm (on average) currently pays on its debts. Even with seven years until loans mature, this is worth considering carefully.
The other issue is that higher interest rates weigh on the market value of the firm’s portfolio. This makes the assets worth less as collateral, which again has the potential to increase borrowing costs.
Should I be worried?
Primary Health Properties has significant debt on its balance sheet. But there are a couple of reasons I’m not overly worried about this.
One is that the business has excellent earnings visibility. With 89% of its rent funded by the NHS, the chance of unpaid rent is very low, which allows it to operate with higher leverage levels.
The other is what happens if the firm’s borrowing costs do go up. Instead of refinancing, the company might try to get shareholders to help pay off its loans by issuing stock.
If that happens, shareholders would be required to buy more shares to maintain their overall stake in the business. But the cost of this would – to some extent – be offset by the 6.5% dividend.
A durable opportunity
There are some risks at the moment that might weigh on returns in the short term. But there are also three reasons I think the stock looks attractive.
First, I think there’s a long-term need. With hospitals struggling to cope with demand for cancer care and routine treatments, there’s pressure for other services to move to the primary care sector.
Second, Primary Health Properties has increased its dividend each year for over 25 years. This doesn’t guarantee anything, but I see it as evidence of a durable business model.
Third, the company’s market cap is currently around half the assessed value of its assets. Even factoring in debt obligations, the stock looks cheap to me.
A long-term investment
In the short term, higher interest rates might well restrict growth for Primary Health Properties. But with a 6.5% dividend, I think the stock is attractive nonetheless.
The share price is currently hovering around the £1 mark. Anywhere below that, I’d be happy adding to my existing investment and getting ready to hold for the long term.
The post A 6.5% yield but down 13! Time for me to buy more of this FTSE 250 gem? appeared first on The Motley Fool UK.
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Stephen Wright has positions in Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
