I’d buy this UK penny share for its dividend growth potential

Just because a share trades in pennies not pounds doesn’t necessarily mean the company isn’t attractive. One UK penny share I have been considering for my portfolio has a strong record of dividend growth. I also think it could keep increasing its payout. Below I look at the share in more detail.

UK penny share with healthcare exposure

The UK penny share in question is Assura (LSE: AGR). Although the shares trade in pennies, this isn’t a small company. In fact, the Assura market capitalisation is almost £2bn.

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It owns and leases a property portfolio focussing on the healthcare sector. So typical tenants include primary care providers such as GPs. I like that strategy for a number of reasons. First, demand is likely to be consistent. The need for primary care provision will remain no matter what happens to the economy. That will likely involve a requirement for physical space in central locations. Even if doctors do more virtual consultations – and lots of dissatisfied patients are arguing that they shouldn’t – they will still need a physical working space.

Secondly, GP surgeries seem like good tenants to me. They have the resources to pay the rent on time. They are also unlikely to make dramatic changes to buildings like some industrial tenants may do. So, when a lease ends, it is easier to lease the building quickly again.

The company said this month that it has added a net total of 16 new properties to its portfolio in the previous six months. It now has 625 properties, with current annualised rent due of around £128m.

Assura’s dividend attracts me

That business model allows Assura to pay a dividend. Currently, the shares yield 3.9%. I think that is attractive enough to consider adding this UK penny share to my portfolio.

But I also like the company’s progressive dividend policy. It typically pays out quarterly. The quarterly dividend stands at 0.74p, around 4% higher than the previous year. Assura has raised the quarterly dividend annually since payouts began in 2012. Back then, the dividend was just 0.285p per share. That means that over the past 11 years, Assura’a dividend has had a compound annual growth rate of 11.2%. That is excellent in my view, and reflects the cash generation possibilities of the business model.

Assura share price risks

While a track record of double-digit annual increases attracts me, dividend history is not necessarily a guide to future payouts. With net debt of £1bn, Assura needs to pay substantial interest. If that cost increases, it could hurt future dividend payment ability. There is also a risk that any reshaping of healthcare delivery could lead to shifting demand for property leases from primary care providers. Over time, that could damage revenues and profits.

Nonetheless, I like Assura’s business model and its dividend appeal. The shares are actually cheaper to buy now than they were a year ago, having lost 4% of their value over 12 months. I’d consider picking them up and tucking them away in my portfolio today.

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Christopher Ruane has no position in any of the 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.

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