Primary Health Properties (LSE:PHP) is a UK income stock I’ve held in my portfolio for years. And following recent share price weakness, I’ve added more to my Self-Invested Personal Pension (SIPP).
Why? After falling back below 100p, it’s one of the best-priced dividend stocks out there, in my view. Just take a look at its dividend yields:
| Year | Dividend yield |
|---|---|
| 2026 | 8% |
| 2027 | 8.2% |
| 2028 | 8.5% |
Each of these figures sail past the FTSE 100 long-term average of 3% to 4%. Being a real estate investment trust (REIT), this is likely to be the first thing potential investors pay attention to.
Yet Primary Health shares also offer excellent value in other ways. Take the trust’s price-to-earnings (P/E) ratio, which is eight times for this year, and plummeting to 7.3 and 7 for 2027 and 2028 respectively.
But could its low valuations suggest something nasty lurking under the surface?
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Rising risks
Primary Health Properties’ share price has slumped following the start of the Iran war in February. Before then, the REIT was changing hands at 108.3p per share. Now it sits back at 91.2p.
The reason? A surge in oil prices that have raised inflationary pressures. Central banks are now tipped to raise interest rates to curb price rises, when cuts had previously been expected.
For Primary Health, this has significant risks. Though roughly nine-tenths of its debt is fixed or hedged, it must be refinanced at market rates when it eventually expires. The result can be a sharp rise in borrowing costs.
Another problem is that higher interest rates tend to weaken asset values. As rates increase, investors typically demand higher property yields, depressing what they’re willing to pay for properties and causing asset values to fall.
Too cheap?
The question is, are these added risks now baked into Primary Health Properties’ low valuation? For me the answer is yes. Its P/E ratio for the current year (8.3) is miles below the 10-year average of 15-16. Yet its broader investment case is as compelling as ever.
As a REIT, Primary Health’s required to pay at least 90% of annual rental profits out in dividends. Given its focus on the ultra-stable healthcare industry, I confidently expect more growing and market-beating payouts. Primary Health has raised annual dividends every year since the mid-1990s.
There are other factors underpinning the trust’s strong cash flows and dividend record. Its tenants are tied down on long-term agreements, and roughly 90% of its rents are guaranteed by government bodies. As an added sweetener, around a quarter of its contracts are inflation linked, which protects profits from rising costs.
So is Primary Health Properties the ultimate no-brainer dividend stock? It is for me, which is why I’ve added more shares to my portfolio. I plan to buy even more when I next have cash to invest.
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Royston Wild owns shares in Primary Health Properties.
