When you find a stock that pays an 8% dividend yield, you have to question its sustainability.
Medical Properties Trust (MPW) is one such stock, and while it may seem like a potential dividend trap, this healthcare REIT’s recent earnings were solid. What’s next for Medical Properties? Is now the time to buy into this growing dividend stock?
Is This Dividend Stock Too Good To Be True?
The market has been rocky this year, making dividend investing more attractive. But when a stock pays a dividend of nearly 8%, it’s reasonable to feel uneasy, especially if you’re a risk-averse investor. After all, the average yield of the S&P 500 is only 1.5%.
So is Medical Properties’ current 7.8% yield too good to be true?
Although this yield is high, it may be more a reflection of the share price falling than an unsustainable payout ratio. When share prices dip, yield increases as long as there are no changes to the dividend issued.
Medical Properties Trust is a prime example of this phenomenon: share prices dropped by over 35% year to date so the yield percentage rose commensurately. For comparison’s stake it’s worth noting that at its 52-week high, the yield offered by Medical Properties Trust was 4.8%.
So, at Medical Properties’ reduced price, are shares a buy, or should investors stay away?
The Numbers Don’t Lie
Medical Properties has a diverse portfolio of properties. This trust has 447 facilities across ten countries, making it a global leader in hospital finance.
On August 3, Medical Properties released its Q2 2022 earnings. Revenue was over $400 million, up 4.8% year over year, and net income was $190 million, compared to $115 million in Q2 2021. However, the most telling metric was the company’s funds from operations (FFO) per share.
Medical Properties’ funds from operations totaled $274.9 million, up 34% from the same period last year. On a per-share basis, FFO was $0.46. Looking at the latter will help you better understand the strength of the current dividend. Since Medical Properties pays a quarterly dividend of $0.29, its payout ratio is 63% of FFO. This value boosts investor confidence that there is a reasonable margin of safety.
The REIT’s dividend history is also worth noting. It dates back nearly two decades. For almost ten years, Medical Properties has consistently increased its payout. The current dividend yield showcases a 45% increase from the quarterly $0.20 paid out in 2013.
What’s Ahead For Medical Properties Trust?
For 2022, Medical Properties expects its FFO per share to fall between $1.78 and $1.82. At the low end of this forecast, the payout ratio would be 65% of FFO — if the dividend remains as-is. Of course, several risks can lead to smaller profits than anticipated. If this is the case, Medical Properties has a substantial buffer between its dividend and expected FFO.
Medical Properties’ built-in protection against inflation is an investment thesis highlight. Annual rent hikes are tied to inflation, supporting Medical Properties’ cash flows.
Notably, MPW tenants are healthcare companies and clinics paid for by insurance companies. Since insurance premiums are also escalating annually, Medical Properties Trust is somewhat insulated from the economic repercussions of inflation. So, don’t expect Medical Properties’ tenants to default at a higher rate than usual.
Why Are Investors Bearish On Medical Properties Trust?
If Medical Properties’ fundamentals and dividends are so strong, why isn’t this reflected in the price of shares?
Shares of MPW are currently trading at rates close to the stock’s 52-week low of $14.06 because of one major factor — rising interest rates. Although Medical Properties Trust is somewhat cushioned from the effects of inflation, high-interest rates make loans more expensive.
The more costly loans are, the harder it is for Medical Properties to acquire properties and build its portfolio. The REIT already has over $10 billion in debt. Its debt-equity ratio is somewhat concerning because of Medical Properties’ slow growth rate.
Is Now The Time To Buy?
Despite rising interest rates, Medical Properties is delivering solid results, and the REIT’s dividend is not too good to be true. Although the dividend could be cut, the payout will still be attractive long term.
Buying shares of MPW could be a compelling opportunity if you’re seeking a high dividend yield. Shares of MPW have significantly declined this year. So, based on its low share price and high yield, Medical Properties Trust is a strong candidate dividend stock to buy now, especially among income-focused investors. The key is having realistic expectations — rapid growth is not likely on the cards here, so invest for the right reasons.