Unite Group plc is one dividend stock I'd buy, but I'd avoid its close peer Hammerson plc


Student accommodation is big business, something shareholders of Unite(LSE: UTG) are well aware of. Over the past five years, the company's earnings per share have exploded higher from 9.8p in 2012 to 27.7p for 2016, and analysts have pencilled in further growth to 29.6p for 2017. Off the back of this earnings growth, the company's dividend payout per share has risen from 4p to 22.1p, an increase of 450%. 

For the first half of 2017, growth has continued. According to Unite's interim results, which were released this morning, operating income rose to £70.7m from £66.3m thanks to a 6% increase in rental income. Pre-tax profit declined from £122.8m in the period last year, to £83.9m. Management blamed this decline on a "lower level of revaluation surplus as a result of yield compression in 2016."

Further growth 

Investors shouldn't concentrate on Unite's reduced pre-tax profit, which is a direct consequence of one-off factors. Instead, shareholders should focus on its outlook. 

Within today's figures, management proclaimed that the company's development pipeline of over 8,500 beds, combined with steady rental income growth, could add 14p to 16p to earnings per share over the next few years. That translates into earnings growth of around 50%. Assuming that the company's dividend payout ratio remains stable at around 1.5 times earnings per share, the shares could pay out 31p in dividends per annum for a yield of 4.5% based on the current share price. 

One-off safety charges 

Unfortunately, alongside the good news contained within today's update, the company also issued a warning regarding some of the cladding used on its accommodation blocks. 

Following the Grenfell Tower tragedy, the company tested samples of aluminium composite material cladding from its 132 properties and results have indicated six of these samples did not meet the required standards. Management is planning to conduct further tests to assess whether or not these buildings need to be re-clad and if so, estimates it will cost between £500,000 and £1.5m in lost rent as well as £2m in construction costs. 

Still, despite this blip, as a long term investment, Unite remains attractive. 

High yield, dull outlook

Based on its bright outlook, Unite is one dividend stock I'd buy, but I'd avoid the company's property peer Hammerson(LSE: HMSO)

Shares in Hammerson support a dividend yield of 4.4%, but over the past five years, the company's growth has been sluggish with earnings per share expanding by only a third and the dividend increasing by 47%. Today the company announced a 5.9% increase in its interim dividend share, off the back of a 75% increase in basic earnings per share. However, rent for the six months ended June 30 only expanded by 9.7% and adjusted profit increased by 6%. Adjusted earnings per share, which exclude one-off factors such as gains from property revaluation, grew by 5.6 % year-on-year. 

For 2017 as a whole, City analysts expect the firm's earnings per share to rise by only 6% followed by growth of 5% in 2018. The company's dividend per share is projected to grow at a similar rate. All in all, compared to Unite, Hammerson's outlook is relatively dull.

Dividends: You can't succeed without them

Dividends are essential for building wealth over the long term because they have the potential to more than double your returns through the miracle of compounding.

If you're looking for more tips on how to improve your investment returns, our analysts have recently put together this brand new free report titled The Foolish Guide To Financial Independence, which is packed full of wealth-creating tips. The report is entirely free and available for download today

What have you got to lose? Click here to download the report today. 

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Read Full Story