Leading primary care property investor Assura(LSE: AGR) has released an upbeat trading update for the first half of the year. It provides clues as to whether it is a high quality income stock, as well as if it is a superior dividend play to popular income stock Shell(LSE: RDSB).
Assura has made multiple acquisitions during the period. It has completed the purchase of 41 medical centres for a gross consideration of £81m. They have a passing rent roll of £4.9m and a weighted average unexpired lease length of 13.5 years, which improves Assura's long term profit outlook. Its pipeline of individual asset acquisitions and developments currently in solicitor's hands are worth £114m, providing evidence of the growth potential of the company over the medium term.
In fact, Assura now owns 363 medical centres, with a total annualised rent roll of £70m. Its growth has been driven mostly by the aforementioned acquisitions, but its income is also being maximised by active asset management. Its financial outlook has also been improved by new borrowing facilities, as well as a reduction in the weighted average cost of debt. This has fallen from 4.84% at 31 March 2016 to 4.3%, while its proforma net loan to value ratio is 36%. This is below the medium term loan-to-value (LTV) range of 40-50%.
Assura is still seeking a new CEO and it announced today that its CFO will work as interim CEO. This adds an element of risk to Assura's outlook, since a new CEO could change the company's strategy. However, in terms of Assura's income prospects, it has considerable appeal. It yields 3.9% and has an excellent track record of dividend growth. For example, in the last four years dividends have increased in each year at an annualised rate of 19.6%. Given its potentially bright future, further brisk dividend growth could lie ahead.
However, the dividend growth available elsewhere may be even more impressive. Shell's combination with BG is set to yield greater synergies than previously thought and the merged asset base of the two companies is forecast to generate significantly higher free cash flow than at the present time. This should allow Shell to not only invest in its asset base, but to also pay a much higher dividend than is the case. And with it currently yielding 7.2%, Shell offers a high yield to begin with. When combined with its dividend growth potential, this makes it a top notch income stock.
Of course, the outlook for the oil price is still highly uncertain. In this respect, Shell is a higher risk option than Assura. Further falls in the price of oil cannot be ruled out. But with Shell assuming an oil price of $60 over the medium term, its forecasts are built on relatively conservative assumptions. This potential for dividend growth as well as its significantly higher yield mean that it is a better income option than Assura at the present time.
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Peter Stephens owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.