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One of many FTSE 250 shares I’ve eyed for my portfolio at varied instances lately is healthcare landlord Assura (LSE: AGR).
With its quarterly dividend now yielding 7.8% per 12 months, proudly owning the shares might be a great addition to my passive earnings streams.
Then once more, a 36% decline within the share worth over the previous 5 years isn’t spectacular.
Nonetheless, it may imply I now have an excellent shopping for alternative. Ought to I act on it?
Explanation why the share has declined
That type of share worth decline for an organization with a rising dividend doesn’t occur with out motive.
Within the case of Assura, I see a few key elements.
One is its steadiness sheet. Internet debt stood at £1.2bn on the finish of March, up from £0.7bn 5 years beforehand.
At a time of upper rates of interest, servicing that stage of debt is a danger to profitability. Nevertheless, all of Assura’s drawn debt final 12 months carried a weighted common rate of interest of solely 2.3%. Final 12 months, Assura had internet rental earnings of £143m and £29m of finance prices.
A second danger is the healthcare focus, as it’s a sector the place accusations of profiteering can imply there’s strain to decrease funding charges of return. Personally I don’t see that as a worrying danger. There’s a clear want for healthcare infrastructure. That should help present or greater hire ranges for now a minimum of, in a easy case of provide and demand.
Not for the faint-hearted
Nonetheless, whereas the FTSE 250 firm’s amenities could also be well-suited to the faint-hearted, I don’t assume its shares are.
The web debt issues me lots. Assura is a property developer and landlord, so it’s comprehensible that it has borrowed to construct. The common rate of interest appears first rate to me within the present atmosphere. However the long-term progress in internet debt signifies that not solely are curiosity prices substantial, the capital quantity to be repaid in some unspecified time in the future can also be sizeable.
Taking the previous 5 years collectively, throughout which profitability has moved round considerably, the corporate has generated below than £200m general in income after tax. That’s lower than £40m per 12 months on common. For an organization with £1.2bn in internet debt that doesn’t impress me.
Partly that revenue stage displays the price of funding annual dividend progress prior to now a number of years. So freezing or reducing the dividend is an apparent manner to assist fund a discount of the debt load – and I worry it may occur in some unspecified time in the future.
No plans to take a position
The principle enchantment of Assura for me is its earnings, backed by a portfolio of properties prone to profit from long-term demand and dependable tenants.
So any danger the steadiness sheet may in the end pose to dividend sustainability is a purple flag to me.
For that motive, I can’t be including the FTSE 250 share to my portfolio. It may turn into a cut price, however I don’t like the danger profile.
