Market Commentary: Is Eye-Watering 13.6% Dividend Too Good To Be True?

I like a good dividend as much as the next investor but, after you’re been around the block for a while, you learn to be a bit skeptical of sky-high dividends.

When a company pays a dividend of 4-5%, or even 6-7% on rare occasions, the payout can generally be sustained. It’s not eating so much of the free cash flows each quarter to create worry that the dividend will be cut or the balance sheet will be in jeopardy. In other words, shareholders don’t want all the cash to be paid out in the form of dividends, thereby killing the golden goose laying the eggs.

So that brings us to a healthcare company, Medical Properties Trust, that is paying a sky high 13.6% dividend yield. Old-school investors will instantly brace themselves when they hear about a dividend that is twice the high-end of the “safe and sustainable” range. But is this a rare gem?

Key Points

• Medical Properties Trust (MPW) share price has fallen by 52% in the past year.
• The company’s balance sheet is also weak, with $10.4 billion in long-term debt and only $302 million in cash.
• Despite these challenges, management is committed to improving the company’s financial performance and maintaining its dividend.

Why The Dividend Went Sky High

It’s clear from a quick look at a price chart why Medical Properties Trust has such an elevated dividend yield; it’s share price has collapsed in the past year by 52%. Investors have punished the decline in recent financial performance, which tapered from impressive growth to flat on an annual basis.

• 2018: 11.7%
• 2019: 9.0%
• 2020: 45.9%
• 2021: 23.9%
• 2022: 0.7%

And while flat annual growth is nothing to write home about, it sure beats the negative results over the past three quarters:

• 2022 Q1: 12.8%
• 2022 Q2: 6.7%
• 2022 Q3: -8.6%
• 2022 Q4: -6.8%
• 2023 Q1: -13.3%

It’s been a punishing selloff as each quarter’s top line comes in worse year-over-year. But dividend investors now might be sniffing an opportunity. Has the share price destruction from the negative results been largely factored into the current share price? Is the balance sheet strong enough to support the ongoing payout?

Will The Dividend Be Paid Out?

Yes, FFO took a hit as interest rates rose, tenant issues cropped up (inability to pay) and asset sales had a negative contribution. With the quarterly dividend at $0.29 per share, the FFO of $0.30 per share is downright concerning. You never want to see the dividend payout ratio up near 100%.

But management appears to have an acute pulse on the risks. It has committed to further asset sales to improve the financial ratios in jeopardy, including the payout ratio and the leverage ratio.

Still, a significant albatross around the company’s neck is the failure of Prospect Medical Holdings, a notable client, from making payments on PA-based hospitals. Management has made it clear that selling these assets should lead to a full recovery but there is uncertainty until then.

The bright side of the story is another lender has agreed to provide Prospect with a lot of liquidity. Perhaps that’s why management had an upbeat feel when reporting earnings in the most recent quarter. Add to the fact there are no debt maturities until 2025 and the company seems to have a promising debt structure.

With all that said, it concerns us that the balance sheet has $302 million in cash and $10.4 billion in long-term debt. To put that in perspective, imagine you had $3,000 in cash and $104,000 in debt. You can see quite how perilous the situation is, and for that reason, we think the dividend is quite risky now and prefer to fish in other pools.