Student accommodation is big business, something shareholders of Unite (LSE: UTG) are well aware of. Over the past five years, the companys 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 companys dividend payout per share has risen from 4p to 22.1p, anincrease of 450%.
For the first half of 2017, growth has continued. According to Unites 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 shouldnt concentrate on Unites reduced pre-tax profit, which is a direct consequence of one-off factors. Instead, shareholders should focus on itsoutlook.
Within todays figures, management proclaimed that the companys 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 companys 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 todays 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 Id buy, but Id avoid the companys property peer Hammerson (LSE: HMSO).
Shares in Hammerson support a dividend yield of 4.4%, but over the past five years, the companys 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 firms earnings per share to rise by only 6% followed by growth of 5% in 2018. The companys dividend per share is projected to grow at a similar rate. All in all, compared to Unite, Hammersons outlook is relatively dull.
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